Getting Ready To Invest

Investing is an opportunity to make greater returns from money rather than accept the dismal interest rates offered by banks.

Beginners can find investing daunting, but spending some time topping up skills to take control of your financial future is well worth the effort.

Why is investing important?

The main reason is that many savers – particularly those under 40 – have pensions linked to funds that invest in stock markets. In the past, pension payments were linked to salary and the length of time spent in a job.

Today, the most common pension is based on the value of a fund – and that value comes from the growth of shares within the fund.

This shift in pensions has led to more people taking control of their investments.

The mechanics of investing is easy once you are used to the jargon and how the markets work. Picking winning stocks and shares is harder but not impossible.

But before you embark on your financial adventure, here are three tests to help clear the way.

Three Tests To Ready You For Investing

Don’t worry; the three tests designed to ready new investors are not that big a deal.

Set aside some rainy day money

Save some money to draw on in case of emergency. Don’t start investing until you have at least three months’ cash in an easy access savings account or even a tin under the bed. Make life easier if you have the money to cover unforeseen events in a hurry, like a car or a boiler breaking down.

Clear your debts

Rank your debts in order of the most expensive interest rates first and work at gradually paying them down. It’s not sensible to prioritise saving over debts because servicing debt usually costs more than any returns from investments. So don’t include your mortgage, but list your expensive credit cards, overdrafts and loans. At the same time, look at switching cards to those with cheaper rates.

Prepare for the long haul

Draw up a contract with yourself that commits to at least five years of investing. Five years gives your finances time to recover from any market blips.

Stock Market Basics

A stock market is where shares, bonds and other securities of public-owned companies are traded.

The London Stock Exchange is the main market in the UK. The LSE is split into several smaller specialist markets, including:

  • FTSE 100 – The top 100 companies in the UK by market capitalisation – which is the total value of all shares in the company
  • FTSE 250 – The next 250 large companies by market capitalisation
  • FTSE 350 or FTSE All Share – Combines the FTSE 100 and FTSE 250 into one index
  • AIM – The Alternative Investment Market comprising smaller ventures and companies backed by venture capital

UK investors can buy stocks and bonds in foreign markets, like the US Dow Jones, NASDAQ and many other major exchanges. However, some are limited to trading by citizenship or different rules.

For example, investors can plug into the Tokyo Stock Exchange via London or New York markets. However, only Japanese citizens or permanent residents can trade on the TSE directly.

How To Invest

Anyone can invest. Trading on the markets is traditionally carried out through a third party, like a stockbroker, which has given way to online investment platforms.

Online platforms allow investors to buy and sell shares, funds, exchange-traded funds and investment trusts. Platforms give no advice; they provide a mechanism for accessing investments.

It’s up to individuals to research and select their investments.

If you do not have the time or confidence to manage your finances, an IFA or other finance professional can manage your portfolio. In addition, some platforms offer dummy accounts so new investors can get the hang of how funds work without risking cash.

Direct investing

Direct investing is not direct in the main sense of the word. The term means buying shares in a company. Choosing shares is about researching a company, the products and services offered, and any current or future risks.

Indirect investing

Indirect investing is usually by taking a stake in a fund which invests in several companies. Fund managers take on the job of researching companies and markets. As a result, funds will have a spread of investments across several companies, market sectors and countries.

For example, a fund will manage a basket of shares, bonds and commodities. Sometimes this basket will contain shares in 100 or more companies.

Most funds have two options – income or growth. Income funds pay dividends, while growth funds reinvest any money earned.

Is My Money Safe In An Investment?

The safety of cash in investments depends on several factors.

In the UK., the investment regulator is the Financial Conduct Authority (FCA).

The FCA has some questions investors should ask before they part with any money.

Can I afford to lose my investment?

Every investment comes with a degree of risk. The rule of thumb is the greater the reward, the greater the risk. Compare your investment to saving with a bank. Savings accounts come with little risk other than the bank going bust or inflation eating into your spending power.

Putting £1,000 into cryptocurrency or £1,000 into a savings account are investments carrying vastly different risks.

The investment return on a cash ISA is around one per cent a year. Investments offering a greater return come with more risk.

Do I understand my investment?

It’s important to understand an investment. You need answers to questions like who are you investing with? Can you get your money back? Why are the returns higher than similar investments?

Is your investment regulated?

A government-backed body supervises regulated investments, but not all investments are regulated, even if they appear so.

Taking a stake in cryptocurrency, commodities – like gold, coffee and pork bellies, hotels, student accommodation, fine wines, and development land are unregulated activities. This means you are unlikely to get money back if the investment goes wrong.

The Financial Services Compensation Scheme (FSCS) does protect regulated investments, but investors looking for high returns from unauthorised firms are likely to miss out.

The FSCS protects up to £85,000 if the investment platform goes out of business and other eventualities, but not if your investment does badly.

If you directly invest in shares, your money is not safe under FSCS rules, and you could lose your entire investment.

Do I need investment advice?

You do not necessarily need investment advice if you are confident in your investment and the firm you are dealing with is authorised to sell the investment.

If you decide to meet with an adviser, check the FCA database to ensure they are authorised to advise about the product or service you are considering.

What Investments Are Best For Beginners?

Funds are an easy and convenient way to invest. The fund manager will have already taken care of picking the shares or bonds, making sure the fund is diversified.

Tracker funds and ETFs are favourites with many new investors because they are designed to reflect the rises and falls of a stock market index.

For example, a FTSE 100 tracker will have balanced holdings from several companies across several trading sectors. When you buy into the fund, you buy a share in the fund, not direct shares in any companies.

Don’t Forget To Check The Charges

Investing comes at a cost that needs factoring into any expected returns.

Funds come with a menu of set-up costs, ongoing administration charges and commissions to fund managers. Charges vary between providers, so check them out and adjust your expected returns accordingly.

Getting Ready To Invest FAQ

Why should I invest?

Investing brings financial independence. The value of cash in the bank degrades with inflation. Investing helps your money retain value and even grow by providing a greater return than any amount lost to the rising cost of living.

How much should I invest?

Most financial advisers would suggest investing between 10 and 15 per cent of annual income. The average full-time salary in the UK is £31,285, which equates to saving between £3,000 and £4,500 each year.

When should I start investing for retirement?

Most financial advisers would recommend saving small amounts over a long time to take advantage of compound interest is best.

What’s the most tax-efficient investment?

Many investments come with tax breaks, like pensions and ISAs in the UK. Pensions are among the most tax-efficient, followed by ISAs and venture capital products like the Seed Enterprise Investment Scheme (SEIS).

Do I pay tax on investments?

Tax rules vary depending on the investment type. Pension contributions are tax relieved while in a fund but taxed when drawn down. Savers pay no tax on ISA cash. SEIS offers many tax refunds and reliefs.

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