Investing for beginners - how to get started

Money Talk by Darius McDermott
Managing director, Chelsea Financial

image captionYou do not need the skills of a professional to consider investing

Everyone has a financial goal. Whether it is saving up for a holiday or buying a house, we all have aspirations that need financing.

Most people start off by putting some money away each month into a cash savings account.

It is usually only when we have built up an "emergency pot", and have a bit more disposable income, that we start thinking about how we could make our savings work harder.

This is when saving generally becomes investing. Why bother?

With interest rates at such low levels, someone saving £200 a month into a cash account, paying just 0.5% annual interest, would earn you £24,614 over 10 years.

Of that, the accumulated interest would be just £614.

If you can find an investment that would return 7% per annum, the extra return could generate a pot of money worth £34,404.

The world of investments can seem complicated and beyond our reach, with some people mistakenly believing only the rich can afford to dabble in the stock market, but that simply is not true.

Anyone can invest and for as little as £50 per month.

Getting started

First, you should think about your financial goal. What are your reasons for investing? What is your timescale? And how much money will you need to achieve this goal?

Then you need to think about your own tolerance to risk.

For example, are you investing for a period of 10 years or more and comfortable that, during this time, the value of your investment may go up and down, or are you close to retirement and would prefer a steady stream of income?

Next you need to decide what type of investment you think will fit your attitude to risk, while still being likely to achieve your goal.

There is a vast array of different asset classes, or types of investment, available.

The most common are shares and bonds, although some people also invest in property and commodities.

Range of investments

Shares are the most well known and conventional type of investment.

They are simply a stake in a company, such as Marks & Spencer, which will often pay its shareholders a regular dividend.

Shareholders benefit from any profit, income or gains enjoyed by that company.

A bond is a glorified IOU, a loan to a company or government that wishes to raise some money.

The time period and the value of the loan are set in advance, with a predetermined rate of interest to be paid to the investor, who get al their money back at the end.

For example, a loan of £100 over five years with an interest rate of 3%.

Bonds are deemed to be at the lower end of the risk scale.

Shares are more risky than bonds, but can be more financially rewarding over the long term.

Investments in property could be in a home (like a buy-to-let flat) or owning commercial property like shops, hospitals or factories.

You can also buy shares in property-related companies.

Commodities are physical substances that are mined or grown such as gold, silver or oil or even grain and coffee.

Pooled funds

Once you have decided on the type of investment you want to make, you should consider how you will invest.

image captionUsing an Isa to avoid tax on your investments is a vital first step when you begin

Investing in an individual company or bond requires a considerable amount of time and research and can be costly.

It can also be risky as you may be putting your faith in the fortunes of just one or two companies.

So unless you have the time and inclination to research them yourself, the most popular way of investing is via a fund, although there are other products available too.

Funds such as unit trusts or investment trusts will have a professional manager investing your money.

They will pool your money with that of other investors and use it to purchase a larger number of assets (usually 40-100).

They will also review the investments to make sure they are doing well and change them if necessary.


There will be costs involved in investing in a fund.

These will be stockbroking fees, stamp duty if buying shares in an investment trust, and also annual management fees levied by the fund managers themselves.

It is always a good idea to shop around and make sure you are not paying over the odds but cheapest is not always best, and value for money is more important.

Some funds will charge more than others, but it may be worth paying more for potentially better returns.

Research which funds you like the look of and what they are investing in.

Never buy something you do not understand.

All this can seem a lot of work but there is help at hand.

Some investment companies, online stockbrokers and fund supermarkets, will offer guidance and education around investments.

They may research funds on your behalf and create a short list of funds they consider to be the best in their field.

Tax free

At this point it is always good to make sure you are using your tax allowances - there is no point giving money to the taxman if it is not necessary.

Usually tax is payable on the income and profits made from an investment, but with careful planning you can make your investment tax efficient.

For most DIY investors, an individual savings account or Isa is the first place to start.

This is simply a wrapper in which to hold your investment.

They can currently shelter up to £11,280 a year of investments, or £5,640 each year in cash, without you incurring any income or capital gains tax liabilities.

A cash Isa is unlikely to have any form of management charge levied by the bank or building society that offers it.

But firms that offer stocks and shares Isas may well levy a quarterly or annual charge to cover their administrative costs.

Once you have made your investment you will need to monitor it to make sure it is performing as you had hoped and that you are on track to achieve your goal.

You should do this at least once if not twice a year.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation.

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