Five-minute guide to investing
1. Analyse your attitude to risk
When it comes to investing, it pays to be objective and think about how much risk you are prepared to take. If you're more used to savings accounts that pay a pre- agreed rate of interest, paying money into an investment that could potentially see you lose money can be daunting.
But this needs to balanced out against the risks of leaving your money in a savings account where it's highly likely it will lose value in real terms as its buying power is reduced by inflation. As a general rule, the longer you have to invest the more risk you can afford to take.
2. Make sure the stockmarket is where you want to be
Before you choose any investment, you need to know what you're trying to achieve with your money, as the exact nature of your financial goals will determine
How much time you have is another major consideration. To maximise the chances of your investment doing well, you need to be able to tie your money up for five years at the very least but preferably 10. If you are likely to need your money in the next five years, it's best to stick with cash.
3. Know your assets
When you invest in the stockmarket, you usually invest in one or a mixture of equities, bonds, cash, property. You can do so directly or, to spread risk, via a collective fund of some sort.
Equities or shares give investors a stake in a company. If the company does well, the value of the shares may rise and you may be able to sell them at a profit. If they fall you can lose money. Some pay dividends, which can be taken as income or reinvested to boost further growth.
Bonds, also known as fixed-interest securities, are essentially loans or IOUs made by investors in return for a fixed rate of interest. Loans to companies are known as corporate bonds, while loans to governments are known as gilts or government bonds. Property in a stockmarket sense usually means commercial property such as warehouses and office blocks – investors benefit when property is sold or from rentals from corporate tenants.
4. Think about asset allocation
Just how much money you invest in each area will depend on your attitude to risk. Cash and fixed interest are at the lower end of the risk spectrum, so cautious investors may want to keep more of their money in these asset classes, while those who can afford to take more risk should be favouring stocks and shares.
Ideally, you need to build a portfolio across asset classes in a way that matches your risk profile. If you were ultra-risky, you might hold up to 100% in equities. More cautious investors might have 30% in equities, 50% in fixed interest and the rest in property and/or cash.
5. Spread the risk further with funds
Although you can invest in all the above assets directly, this approach is high risk and expensive.The easy and affordable way to invest in all of these asset classes is via a collective fund. Here, your money is pooled with that of other investors and investments are bought and sold on your behalf by a fund manager in line with the objectives and risk profile of the fund in question.
With such a large amount of money to invest, the manager will be able to buy a lot more holdings than you would be able to, providing instant diversification and reducing your risk. Costs are shared with your fellow investors.
6. Know how to buy a fund
You can buy a fund directly from a management group but this is expensive. It's cheaper to use an online fund platform, which will allow you to buy funds from across the investment universe.
These platforms are also more convenient because they allow you to hold all of your investments in one place. Plus, if you're not sure where or what you want to invest in, they include lots of tools to help you research and choose the most appropriate funds.
7. Shield your investments from tax
The government allows us to shelter investments from tax each year. You can choose an individual savings account (to shield up to £15,240 this year) or a self- invested personal pension, to name but two.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.