Investments
Investing is a route to make your money work for you, that comes with different level of risk to something like a savings account.
In this section we focus on the basics and how to get started.
Contents
Introduction to Investments
In summary
You invest money and instead of getting savings interest, if the investment increases in value, that generates the profitable return for you (to then withdraw later at the higher value).
The most important thing to remember here is, the value of your investment can go up AND DOWN, which is what makes investing higher risk than a simple savings account (see next section on risk).
Some investment examples:
- Shares in a specific company
- Stocks either UK or Overseas
- Funds
- Bonds
- Gilts
Disclaimer: If you decide to invest, your capital (ie money) is at risk – please be aware the value of your investment can go down as well as up and you may get back less than you invest.
Useful Links
See the Make My Money work blog post here on how to set up an investment.
Determine your acceptable level of risk
Investments have varying levels of risk – usually the higher the risk, the higher the potential return BUT also the higher potential loss too.
Typically the younger you are, the higher risk you can cope with. That’s mainly because you have longer for your investment to recover, say if it dropped in value for a period of time.
If you have more disposable income, you’re also likely to be able to cope with a higher risk level of risk but only in the sense of, you won’t be financially screwed if those investments lost value!
Think about risk in the context of “how much £ loss would be acceptable to me?”.
Higher acceptable risk = higher proportion of riskier investments, such as company shares.
Lower acceptable risk = higher proportion of lower risk investments, such as bonds and gilts.
Useful Links
Aviva has a risk profiler questionnaire here, that will tell you into which of the 5 risk tolerance levels you fall into.
Set up a Stocks & Shares ISA
A tax-efficient investment account, such that you don’t pay tax on anything you earn through the ISA (individual savings account).
Much like a cash ISA which you may have heard of, there are lots of providers who offer a stocks and shares ISA. Those providers are often referred to as a platform.
So instead of holding cash, you hold investments within the ISA and you’re not taxed on the income or increase in value it may generate.
There’s an annual ISA allowance of £20,000 (for 2023 to 2024 tax year), so for example if you already have £1,000 in a cash ISA you could only put £19,000, within the tax year, into a stocks & shares ISA.
You set the ISA up usually by applying online, with basic details like your name, address, bank details and national insurance number.
Warning: Watch out for high platform charges. If they charge you 2% per annum but you only earn 2% on the investment, you’re no better off!
You CAN invest outside of a Stocks & Shares ISA, much like you can set up a savings account outside of a Cash ISA. This is just the more tax efficient and simpler ways to get started.
Useful Links
Like you compare car insurance providers, you can use comparison websites like Money Super Market to compare different providers/platforms.
Choose your investments
Now you know your risk level and you’ve set up the mechanism to invest, you can now choose what to invest in!
You can purchase shares in a specific company, stocks either UK or overseas, funds, bonds or gilts. See the glossary for the definition of each of these.
In terms of choosing what you invest in, your options are:
- Do the homework and research yourself; or
- Engage a financial advisor to do that bit for you. But, even they can only recommend and can’t guarantee the return on your investment.
Some suggested reading on the DIY approach:
- The Millionaire Teacher by Andrew Hallam
- Quit Like a Millionaire by Kristy Shen (US based but theory relevant for UK)
- How to Own the World by Andrew Craig
- Check investments on the FCA warning list as ones to avoid!
Warning: Any past performance is not a reliable indicator of future performance. So if an investment sounds too good to be true, it probably is!
Useful Links
Some of the better-known UK platforms:
