Beginner's guide to investing

Successful savers know it’s important to make their money work hard. Investing money presents an opportunity for improved returns that, over the long run, are likely to exceed interest rates high street banks can offer.

But every investment carries risk, and it’s important to understand what can happen to your money when you make investments.

At Saga Money, we’ve partnered with experts in the key aspects of investing. In this guide, we address common questions, including how beginners can start investing in the UK, the risks involved and an overview of how the stock market works.

What is investing?

Investing means putting money into stocks or other assets with the goal of making a profit over time.

Unlike savings accounts, where you earn profit through interest, investing carries risks. You could make money, but you could also lose it. 

Before diving into the world of investing, it’s important to understand the potential risks.

There are plenty of options for what you can invest in, including:

Shares

You buy shares in a company. When this company does well, the value of your shares rises (capital gain). When the company struggles, the value of your shares can decrease (capital loss).

Funds

Funds are like a big pot of money that many people contribute to. Instead of investing individually, everyone’s money is combined into one fund. Then, the fund manager uses that money to buy shares and bonds. Your investment remains your own but the fund total has more bulk-buying power.

Spreading investments across various funds within the portfolio means the risk is shared. If one investment fails, the impact on each person’s money is less because it’s part of the larger fund.

Bonds and gilts 

Bonds and gilts involve lending money to companies or governments. The repayment includes a fixed rate of interest.

What are the risks of investing?

Most investments have risks attached. There’s no guarantee of making a profit, and there’s always a chance you could make a loss. However, unlike many risks in life, investing also comes with potential rewards if you get it right. 

How much risk you want to take is at the heart of investing. The more money you invest, the more profit you can potentially make and the more money you can potentially lose.

Other risks to keep in mind when investing include:

• Time. You’re more likely to earn a better return by leaving your investment for longer.
• Emotional investing. A knee-jerk reaction to a change in the market.
• Diversification. It’s important not to put all your eggs in one basket. Spreading your investments can be more beneficial. 

Stock market investments go up and down. It’s important to understand this before parting with your money.  While there’s a risk of receiving less than your initial investment, over time, market fluctuations tend to balance out, providing an opportunity for your money to grow.

Start by calculating what you can afford to lose. Before investing, think about how you would cope if your investments fell by 10%, 30% or 50%. Then, you can set a limit for yourself.

You should only invest money that you are happy to have tied up for at least five years – the potential for ups and downs means the stock market is not the ideal place to save for next year’s holiday.

How to start investing as a beginner

When you understand the risks and rewards of investing, there are a few more things to consider before you start.

1. Set clear investment goals

Figure out what you want to achieve with your investments. Are you looking for long-term growth or steady income?

2. Assess your budget

Calculate how much money you can afford to invest. Remember, you’ll need to be comfortable without this money for a period, so don’t invest any monthly living funds.

3. Understand risk tolerance

Some people are comfortable with higher-risk investments, while others prefer more stability. Assess your risk tolerance. Are you willing to take on more risk for potentially higher returns, or would you rather make less risky investments?

4. Choose an investment account 

Open an investment account, such as the Saga Stocks & Shares ISA. Look for one that aligns with your investment goals. Capital at risk.

As a beginner, it can be a good idea to start by investing a small amount of money while you get comfortable. You can increase your investments as you gain confidence. 

It’s a good idea to diversify your investments, spreading them across different types (stocks, bonds, etc.) to reduce risk. Consider ready-made portfolios, which are designed to do the hard work for you.

Remember, investing is a long-term commitment. Avoid making impulsive decisions based on short-term market fluctuations.

How to choose the right time to invest

Choosing the right time to invest can be difficult. One deciding factor could be the funds you have available. If you have money you don’t need for a certain period, investing could be a good option.

Time in the market

It’s vital that you consider time on the market. When it comes to investing, time really is the most powerful tool available to you. Let’s explain why with an example:

1. Your savings:

• You start saving £100 per month for 10 years.
• At the end of 10 years, you have £12,000 saved.
• You decide to stop saving but keep the £12,000 invested.

2. Your friend’s savings:

• Your friend starts saving 10 years after you did.
• They also save £100 per month, but for 20 years. 
• So, they’ve saved a total of £24,000.

3. Interest earnings:

• Both of you earn 5% interest per year on average.
• Over 30 years (since you began saving), your investments grow due to compounding (interest on your investment).

4. Results:

• Your investment grows to £41,123.
• It cost you £12,000 to save that amount, so your investments grew by £29,123.
• Meanwhile, your friend’s investment grows to £40,745.
• It cost them more to save that amount (£24,000), and their investments only grew by £16,745.

So, even though your friend saved more initially, because you started saving earlier, your investments grew more due to the power of compounding, making you better off in the long run.

Pound-cost-averaging

You might also want to consider drip-feeding your money, contributing smaller amounts regularly instead of a lump sum. This is also known as pound-cost-averaging. Here’s how it works:

1. Consistent contributions

You invest a specific amount every month, regardless of the market.

2. Market fluctuations

Stock prices go up and down. When prices are high, your fixed amount buys fewer shares. When prices are low, your fixed amount buys more shares.

3. Smoothing out volatility

By investing consistently, you avoid the pressure of trying to time the market perfectly. Over time, this strategy can balance the impact of market fluctuations.

Remember, investing is a long-term commitment, and consistency matters more than trying to time the market.

Investing in stocks or shares

When you buy shares (also known as stocks), you become a shareholder in a company, which means you own a piece of that company. 

Shareholders can benefit from potential gains if the company performs well. However, there’s also a risk of losing money if the company’s stock value drops.

Investing directly in individual company stocks can be rewarding but risky. If the company does well, your investment grows. If it struggles, you may lose money. 

In contrast, investing in funds means pooling your money with other investors into a diversified portfolio of stocks from different companies. If one company’s stock performs poorly, it shouldn’t significantly impact your overall investment.

Investment value can go down as well as up and you could get back less than you invest. Tax treatment depends on your personal tax position. Tax rules are subject to change by the UK Government. The information provided on this website should not be taken as a recommendation, advice or forecast. You should seek financial advice if you are unsure about investing.

How the stock market works

When a company grows and needs extra funds, it can issue shares. These shares represent ownership in the company. Often, companies sell shares to investors and use the money received to expand their operations.

If the company makes a profit, each shareholder receives a share of that profit (dividend). The amount of dividends given to shareholders depends on the company’s decision – usually up to the board of directors, who will set a dividend strategy. It’s possible for the company to hold back money and pay smaller dividends or none at all if they wish to re-invest in the business or retain their accumulated profits.

In addition to dividends, the value of each share can increase as the company’s prospects brighten. Shareholders can profit further by selling shares that have increased in value.

The largest companies in the UK have shares that are traded on the London Stock Exchange. Anyone can buy these shares at their market price. 

It’s important to consider the risks attached before buying shares in a company. If you own shares in a company that goes out of business, you risk losing your money.

Investment scams

Criminals can organise fraudulent investment firms with the aim of stealing money. 

This might involve taking investments in unsuitable, high-risk ventures, like overseas land purchases, or just taking your money and disappearing.  

Beware of being contacted about ‘investment opportunities’ and be extra cautious if it seems like someone is pressuring you into making a decision. The old adage of 'If it sounds too good to be true, then it probably is' often applies.

If you’re suspicious or want clarification on how an investment works, seek advice from a trusted professional or walk away.