Investing can seem intimidating, especially if you’re new to it. With so much information out there, it can be hard to know where to begin. In this blog, we’ll walk you through the basics of investing, the steps to take, and how you can get started on your journey to growing your wealth.
Why Start Investing?
Before diving into the ‘how’, let’s first understand why investing is so important. Investing is a great way to grow your money over time. Unlike keeping your cash in a savings account, where interest rates can be low, investing gives you the potential to earn higher returns. Over the long term, investing helps you build wealth and achieve your financial goals, whether that’s saving for a house, funding your retirement, or simply growing your money.
Step 1: Create an Emergency Fund
Before you even think about investing, make sure you have an emergency fund in place. This is your financial safety net for those “just in case” moments—whether that’s unexpected car repairs, medical bills, or job loss. Aim to save 3-6 months of living expenses in an easy-access account. This will give you the peace of mind to start investing, knowing that your immediate financial needs are covered.
Step 2: Understand Your Financial Goals
Before you start investing, take a moment to think about your financial goals. Do you want to save for a specific purchase, like a home or car, or are you looking to build a retirement fund? Your goals will influence the type of investments you choose.
- Short-term goals (within 5 years): If you need the money soon, you’ll want safer investments like bonds or cash ISAs.
- Long-term goals (5+ years): For long-term goals, investing in stocks or funds has the potential for higher growth but could be more risky.
Step 3: Learn the Basics on Investing
Understanding a few key terms will make your investing journey easier. Here are some basics you need to know:
- Stocks: Shares of a company. When you buy a stock, you own a piece of that company.
- Bonds: Loans you give to a company or government, which they repay with interest over time.
- Funds: A collection of different stocks, bonds, or other assets. Funds spread the risk by investing in multiple things at once.
- Risk and Return: Risk is the chance of losing money, while return is the potential gain. Higher-risk investments (like stocks) have the potential for higher returns, while lower-risk investments (like bonds) offer more stability but smaller gains.
Step 4: Start Small with an ISA or Pension
If you’re just starting, it’s a good idea to use tax-efficient accounts like a Stocks & Shares ISA or a pension.
- A Stocks & Shares ISA allows you to invest up to £20,000 a year, and any returns are tax-free of income and capital gains tax but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers. This is a great option if you’re saving for long-term goals, as your money can grow over time without being taxed.
- A pension is another excellent way to save for the long term. Not only do you get tax relief on the contributions you make, but your investments also grow tax-free until you start withdrawing in retirement.
Step 5: Diversify Your Investments
One of the most important principles in investing is diversification. This means spreading your money across different types of investments to reduce risk. By investing in a mix of stocks, bonds, and funds, you’re less likely to lose money if one area performs poorly.
You can easily diversify by investing in a fund, such as an index fund or an exchange-traded fund (ETF). These funds invest in a wide range of companies, industries, or asset types, giving you broad exposure without the need to pick individual stocks.
Step 6: Think Long-Term Investing
When it comes to investing, patience is key. Investing is long-term, and the value of your investments can go up and down over time. It’s important not to panic during short-term market drops. Historically, markets tend to recover, and sticking with your investments over the long term gives you a great chance of growing your wealth.
Step 7: Stay Informed
While you don’t need to become an expert, it’s a good idea to stay informed about the basics of investing and how the market works. Read articles, listen to podcasts, or follow social media accounts and financial news to keep up to date with changes in the market and trends in investing.
Common Mistakes to Avoid
Here are a few mistakes beginners should watch out for:
- Investing without a plan: Always have clear goals and a plan in place before you invest.
- Chasing quick gains: Investing is not a get-rich-quick scheme. Focus on long-term growth, not short-term wins.
- Not diversifying: Putting all your money into one stock or asset is risky. Spread your investments to reduce the risk.
Final Thoughts: Just Start!
The most important step in investing is to get started. You don’t need to be wealthy or have a lot of money to begin—starting small and contributing regularly can make a huge difference over time. Whether you’re looking to build a retirement fund or grow your savings, investing can help you achieve your financial goals.
If you’re unsure where to begin, consider speaking with a financial adviser who can guide you through the process and help you make informed decisions based on your goals and risk tolerance.
Ready to start your investment journey? The sooner you begin, the more time your money has to grow!
For ISAs, Investors do not pay any personal tax on income or gains, but ISAs may pay unrecoverable tax on income from stocks and shares received by the ISA managers.
The value of investments/pensions and the income they produce can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Past performance should not be regarded as a guide to future performance.
The Financial Conduct Authority does not regulate advice on both cash held on deposit and taxation.