What is investing?

Key takeaways

• People invest to grow their money, beat inflation and generate income (i.e. from dividends).

• You can invest in the stock market by buying shares in companies

• Investing is riskier that saving in cash as investments can both increase and decrease in value

• You don’t need a large amount of money to begin investing

What is investing?

Investing is the process of putting money into assets – such as stocks, bonds, property, or businesses – with the goal of generating a financial return over time.

Rather than simply saving money in a bank account, investing aims to grow your wealth by earning income (like interest or dividends) or by benefiting from an increase in the value of the assets you own.

The idea is to make your money work for you, helping you build long-term financial security.

But while investing offers the potential for higher returns than saving, it also carries risk – asset values can go down as well as up, and returns are not guaranteed. Past performance is no guarantee of future returns

An easy way to start investing is opening a stocks and shares ISA.

What are stocks and shares?

Stocks and shares both refer to units of ownership in a company, and the terms are often used interchangeably.

When you buy a share (or stock) in a company, you’re buying a small part of that business.

As a shareholder, you may earn money if the company does well through dividends (a portion of profits) and if the share price increases, allowing you to sell at a profit.

How can I buy and sell shares?

Investors buy and sell shares with the intention of making a profit.

To buy and sell shares, you’ll need to use a stockbroker or online investing platform that gives you access to the stock market.

Shareholders have the ability to trade their shares on the stock market, with share prices fluctuating in response to a company's performance and market projections. It's this volatility that can make investing in shares both exciting and nerve-wracking. 

How does investing work?

Investing works by putting your money into assets – like stocks, bonds, or property – with the goal of growing its value over time or earning income. Diversification is spreading the risk by investing in different assets.

When you invest, you’re using your money to buy something that has the potential to increase in worth or generate regular payments, instead of just holding onto cash, which can lose value due to inflation.

The principle behind investing is to buy low and sell high. However, this is easier said than done, as the market is unpredictable and comes with various risks that can impact the value of investments. 

You should invest with a long-term, not short-term, view.

How can I invest in the stock market?

Here is how you can begin investing in the stock market:

What is capital gains?

Capital gains are the profits you make when you sell an asset for more than you paid for it.

In investing, this usually applies to things like:

• Company shares

• Property (that’s not your main home) or real estate

• Cryptocurrency

• Collectibles (like valuable art or antiques)

For example, if you buy shares for £2,000 and sell them later for £3,000, your capital gain is £1,000.

Investments don’t always make a capital gain; some make a loss. Your aim as an investor is to make a capital gain - or profit.

Types of investments 

There are various types of investment, known as asset classes, each with its own potential benefits and risks:

Alternative investments

Alternative investments are types of assets outside the traditional categories like stocks, bonds, and cash. This category includes things like art, gold, and fine wine.

Finding the right investment for you 

Choosing the right investment strategy is a personal decision that should align with your risk tolerance and financial goals. 

For the cautious investor 

If you're very cautious and don’t want to risk the possibility of losing any money, then consider opening a savings account with a set interest rate instead.

Alternatively, ETFs are generally considered low-risk investments, especially if you’re looking to make a long-term investment with a low level of risk.

Open to risk 

Those who are more open to taking risks might find themselves drawn to investing in companies, accepting the potential ups and downs brought on by market volatility. 

What is a stocks and shares ISA?

A stocks and shares ISA is a UK tax-free investment account that lets you invest in a wide range of assets – like stocks, funds, and bonds – while protecting your profits and income from tax.

You can save or invest up to £20,000 in an ISA each tax year.

Starting with small investments 

The good news for beginners is that you don’t need a large sum to start investing. Some platforms allow you to start with as little as £1, making it accessible for everyone.

Potential losses 

Investment losses occur when the value of your investment drops below what you paid for it. This means you could get back less than you originally invested, especially if you sell during a downturn or if the company you invest in performs badly.

Investment costs 

There are various fees can eat into your investment returns:

What should I consider before I start investing? 

Before you start investing, there are several factors to consider:  

• Have an emergency fund: Ensure you have 3-6 months of living expenses saved before you begin investing 

• Think long term: Investments should generally be considered for a minimum of 5 years 

• You could lose money: Always be aware that there's a risk of losing your investment  - how much this will affect you depends on your financial situation

• Market volatility: Be prepared for the ups and downs in the value of your investment 

• Tax-efficiency: Use ISAs to shield your investments from income tax and capital gains tax.

You may also like:  

• Peer to peer lending explained

• Should I invest my money or save it? Can help you decide between investing and saving 

• All you need to know about ethical investments provides information on how to invest with a conscience 

Finding a stocks and shares ISA  

MoneySuperMarket simplifies the process of finding the right stocks and shares ISA for your needs, making it easier for you to choose the best ISA for your investment goals.