Investing for beginners

What you need to know before you start to invest

If you’ve never invested before, you’ll probably be wondering what it’s all about. It’s easy to get intimidated by all the jargon and investment options, but it honestly doesn’t need to be complicated.

Here’s what you should know before you get started.

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Here at Be Clever With Your Cash, we’re not regulated to give you financial advice. We aim to give you the facts about a provider or investment but it’s up to you to decide if it’s suitable for you. If you’re looking for more personalised guidance, find a financial adviser who can give you specific advice. Remember that your capital is at risk when investing — don’t invest more than you are prepared to lose. 

Why invest?

If you want to start investing, it’s a good idea to know why people do it in the first place.

For most, investing gives you a better chance of growing your money compared to leaving it in the bank. Over the long-term, investing usually generates higher average returns than saving in cash.

But that’s not to say cash is dead. Cash savings should definitely have a place in your plan. You need cash set aside for emergencies (ideally three to six months’ outgoings), such as if your car breaks down or if the fridge gives up, as well as for short-term goals like going on holiday. 

However, cash is not so good for increasing your wealth over the long-term, which I’ll explain more about below.

What is an investment?

An investment is something you buy that you hope will increase in value, and make you a profit, or provide an income in the future, or both.

You’ve probably heard of some of the more common investments, such as stocks and shares (where you buy part of a company), bonds, property and gold. But you can invest in a whole load of alternative assets including private equity, commodities and hedge funds. Some people also invest in rare paintings and other collectables. 

We’re focused here on investing in stocks and shares.

Cash vs investing

As I mentioned above, there’s lots right with cash. But in the long-term, it doesn’t tend to keep up with inflation. 

Inflation is the increase in prices over time. In a nutshell, goods and services become more expensive and you can’t get as much for your money. But as we’ve seen, the returns on cash savings don’t tend to beat or even match inflation. Particularly as the income that you receive on your savings can be subject to tax, something that many people forget about.

This means you’re losing money if you keep money in the bank that doesn’t earn enough to keep up with inflation, even if your balance stays the same. 

You can see below how the rate of inflation impacts cash over time in the chart below, based on a starting sum of £1,000:

Inflation	2%	3%	4%	5%
£1,000 after one year	£980	£971	£962	£952
£1,000 after five years	£906	£863	£822	£784
£1,000 after 10 years	£820	£744	£676	£614

As you can see, if £1,000 was left in an account that paid no interest it ends up worth much less over time especially if the rate of inflation increases.

At the moment, there are some savings accounts that beat the current rate of inflation – so the dent in your cash won’t be as extreme. 

However, if you’re looking to grow your wealth over time, having all your money in cash isn’t the way to go.

If we look at investing in stocks and shares, also called equities, history tells us that this usually matches or exceeds inflation in the long-term, giving you more spending power in the long-run. But only invest money that you don’t need and be prepared to tie up your money for at least five years. 

Your investments are bound to go up and down over time, which can be stressful, but if you don’t panic and ride it out, the markets should bounce back eventually.  

Both cash savings and investments benefit from compound interest, where you reinvest the income to buy more savings or investments. With stocks and shares you often receive income in the form of dividends. But the compounding effect can be more effective with stocks and shares investing. 

That’s because the underlying investments also have the potential to grow in value as the companies you invest in make profits and expand their businesses.

Imagine a snowball rolling down a hill and growing in size as it goes. That’s what can happen to the value of your investments over time.

What about investment risk?

When you invest, the value of your investments can go up and down and your returns are never guaranteed. You may also end up with less money than when you started. You can have a look at past performance of investments to help you understand the history of it, but past performance is not an indication of how an investment may perform in the future. 

Any investment comes with risk and they’ll be clearly marked as high-risk, medium-risk and low-risk, or sometimes on a scale of one to seven with one being lowest risk and seven being the highest.

Generally speaking, higher risk investments offer the chance of higher returns but also the potential for bigger losses. Meanwhile lower-risk assets will give you potentially lower returns but less chance of your initial sum dropping in value. 

With this in mind, you should never invest money you can’t afford to lose.

How to invest

The good news is you’re probably already investing – via your pension! When you join a pension scheme, such as one at your work, your monthly contributions are automatically invested. This is typically into the scheme’s default fund which is usually made up of a mix of assets such as shares and bonds.

If you’re looking to invest in the stock market, you’ll need somewhere to buy the stocks and shares (often called a platform). This could be a bank or dedicated app or website. You’ll be familiar with names like Trading212, AJ Bell and Interactive Investor. We’ve listed our favourites in our best buy tables.

Once you have a platform, you’ll need an account to hold them in, either a Stocks & Shares ISA, a General Investment Account (GIA) or a pension. We’ve explained more about this process in our how to invest article.

Then of course, there are the investments themselves. You have a number of options here, from stocks of individual companies through to funds that group together multiple companies. 

And there’s also a choice of whether you want to choose these yourself via a DIY investing option, pick a semi-automated Robo-fund or pay extra for experts to try and beat the market in a managed portfolio.

Before you invest

Before you jump right into investing, there’s a few things you need to sort out first.

It’s a good idea to pay off any high-interest debts, like credit cards and personal loans, before you look at investing. This is because there’s no guarantee the gains you make investing will beat the interest you’re paying on your debts, so you could still end up losing money overall if you don’t clear them first.

You should also make sure you’ve got a cash buffer of at least three months’ outgoings. You want to have this in an easy-access account so you can use it for unexpected emergencies, like car repairs or if you lose your job. 

Having an emergency fund before investing means if something unexpected happens you won’t need to panic-sell your investments, which could result in a loss, or take on expensive debt to cover your costs.

Also, think about getting insurance to cover yourself and your family if you lose your job or, in the worst case scenario, die.

In a similar way to having an emergency fund, having this kind of insurance means you or your family don’t have to worry about urgently cashing in your investments if you come into financial difficulty. 

It’s also worth seeing if you should add more money to your pension. It’s still investing and there are additional benefits. For example, you can get free cash from your employer if you up your contributions, while higher and additional rate taxpayers will benefit from extra tax relief.

Beware of investment scams

Investment scams are rife and come in many forms. You could be telephoned out of the blue by a fraudster posing as a broker or you could see firms that appear legitimate, advertising online and on social media. Crooks also create dupe websites of genuine firms that can be incredibly hard to spot. 

With investment scams, criminals convince you to transfer money for fake investments and then disappear and the losses can be life-changing.

You should always pick an investment platform that is regulated by the Financial Conduct Authority. These firms will have a code of conduct promising to treat customers fairly, will provide you with information that is clear, fair and not misleading, and will have systems in place to protect your data and money.

Make sure to check the FCA Register or call the FCA to ensure the investment company is authorised.

Should I invest?

If you want to grow your money over the long-term, investing could be worth looking into. Investing isn’t for the short-term, though; any money you do invest needs to be kept invested for at least five years. You’ll also need to consider the risks versus return and how investments sit within your overall financial plan.