A beginner's investment guide
Key takeaways
Investing in the stock market can be a rewarding way to grow your wealth, but it’s essential to consider the risks and make informed decisions as returns aren’t guaranteed and you could lose money
You need to be in it for the long term, rather than looking for quick profits
Choose investments that align with your financial goals, attitude to risk and circumstances
Diversify your money to help reduce risk
Investing in the stock market can seem like an appealing way to grow your money over the long term. It certainly has the potential to generate higher returns than keeping your money in a savings account. However, investments can fall as well as rise and returns aren’t guaranteed; you could get back less than you invest. It’s important to understand the risks and consider whether investing is right for you.
What should I consider before investing?
Before investing for the first time, there are lots of things to consider, including how long you’re willing to leave your money invested, how much risk you’re comfortable taking, the costs involved, and how ‘hands-on’ you want to be. Here are some of the key questions to ask before getting started.
Am I prepared to invest for the long term?
Investing in stocks and shares isn’t about making a ‘quick win.’ Generally speaking, you need to have a time horizon of at least five years, as markets can fluctuate, and the value of your investments can fall as well as rise. A longer timeframe gives your investments more opportunity to ride out periods of volatility.
Can I cope financially if my investment falls?
It’s crucial to be aware of the potential for financial loss. The value of your investments can go down as well as up, and you may not get back the amount you invested. You should only invest money you can afford to lose – without putting your financial security at risk.
How much risk am I prepared to take?
Each of us has a different attitude to risk, and you need to decide what level you are comfortable with. Your attitude to risk should help guide the types of investments you choose.
What are the costs involved?
There are fees associated with buying, selling, and managing investments. These can vary and should be factored into your financial planning.
Should I pay off debt before I start investing?
Yes. You should always aim to pay off high-interest debt before you start investing. If not, there’s a risk the interest you’re paying on overdrafts, credit cards and other expensive borrowing could outweigh any returns you make from the stock market – especially as stock market returns are not guaranteed.
Do I need an emergency fund before I invest?
Yes. Before you start investing, you should ideally look to have between three to six months’ worth of essential spending in an account (your ‘emergency fund’), which can be accessed at short notice. This can provide a buffer if something unexpected happens, such as redundancy, illness, a boiler replacement, or costly car repairs. An emergency fund can help build your financial resilience.
How hands-on do I want to be with my investment?
Investors have a range of options, from personally managing their portfolio to employing the services of brokers or robo-investors.
Are there specific sectors or companies I want to invest in?
Your personal preferences, values, or insights might lead you to invest in specific industries or companies. This should align with your overall investment strategy and risk tolerance.
Is my money protected when I invest?
While investment platforms and firms providing financial services in the UK must be authorised by the Financial Conduct Authority, this protection doesn’t cover losses simply because your investments fall in value. Remember the value of stocks and shares can go down as well as up and you could get back less than you invested.
What investment accounts can I choose from?
You can invest via different types of accounts. Some of the main options include:
Stocks and shares ISAs – you can invest up to your annual ISA allowance (in the current tax year, this is £20,000). A great benefit of ISAs is that they protect the growth and income from tax.
General investment accounts – if you’ve used up all your tax-efficient investment options, this is an option. There is no upper limit on how much you can invest, but you won’t benefit from the tax advantages.
How to start investing in stocks
The process of buying and selling stocks for companies listed on the stock exchange is quite straightforward once you get to grips with the basics:
Choose how you want to invest
You have a range of options here, including hiring a stockbroker, consulting a financial adviser, managing shares via an online investment platform, or opting for robo investing.
Open a tax-free investment account
Consider opening your account as a stocks and shares ISA through MoneySuperMarket. This will allow you to benefit from tax-free growth on up to £20,000 invested each year (the current annual ISA allowance)
Research your investment options
While you can invest in individual stocks, the best option for beginner investors is more likely to be a fund. These are a kind of ‘shopping basket’ full of different types of investments, offering diversified exposure to the stock market. If you invest in funds through a platform, you can choose between traditional funds, typically bought and sold through a fund manager, and exchange-traded funds (ETFs), which are traded on the stock market.
Choose the right platform
An investment platform lets you buy and hold a range of investments in one place. When choosing one, compare the fees and charges carefully. This includes the fees levied when buying investments, as well as account management fees. Also check out fund performance and quality of service.
Decide your risk level
Your attitude to risk will depend on factors such as how long you plan to invest for, your financial circumstances, and your investment goals. Give some thought to how you’d feel if your investments fell in value and how much you could afford to lose.
Decide how much you want to invest
Invest only what you can afford to lose. Diversification is key: this means having your investments spread out across different companies, sectors and regions
Deposit money into your investment account
Follow your chosen platform's instructions to deposit funds, which will remain as cash until you choose to invest.
Purchase your desired stock or funds
When you’re ready, use the investment platform to buy your chosen stocks or funds. Most platforms offer guidance and can recommend options to help you get started. Keep an eye on the charging structure when making these purchases.
Manage your portfolio
Regularly review your investments, making buys or sells as you see fit. Use the tools provided by your platform to make informed decisions.
What are the advantages and disadvantages of stock market investment?
Here are some positives and drawbacks to consider before you start investing in stocks:
Advantages
Potential for high returns: There is no cap on the returns you can achieve
Tax-free growth within an ISA: Utilise the tax advantages of an ISA to maximise your returns
Diverse investment choices: A wide array of options means you can find investments that suit your strategy
Ease of use with investment platforms: Platforms offer varying levels of involvement, catering to both hands-on and hands-off investors
Disadvantages
Risk of loss: The value of investments can fall
Costs: Fees can eat into your returns
Time: Researching stocks and staying informed can be time-consuming and outcomes are never guaranteed
Should I invest monthly?
Investing each month can help smooth out the cost of share purchasing and allows for a consistent investment strategy without overstretching financially. Rather than trying to time the market, doing it little by little can help smooth out the ups and downs. This approach is known as ‘pound cost averaging’ and can be helpful if you’re risk-averse.
Investing each month doesn’t rule out the value of your shares dropping though.
If you are concerned about losing money, then savings accounts offer a safer alternative, although they don’t have the potential to make such large returns.
Discover your ideal stocks and shares ISA
MoneySuperMarket offers a selection of investment ISAs, providing details on minimum investments, fees, account management, and ISA transfers. Opening an account with your chosen provider is quick and straightforward.
Author
Esther Shaw
Money expert
Esther Shaw is an award-winning consumer, financial and property journalist with more than two decades of experience. As a freelance writer, she regularly contributes to a range of national titles...
Reviewer
Alan Cairns
Senior Content Editor
Alan breaks down money, home, and energy topics into plain English to help you save money. Ask him about pound cost averaging or Balkonkraftwerk.
