August 29, 2014

Investing for beginners

Welcome to the investing for beginners page at Investoo. This page is aimed at beginners to the world of investment and would like an easy to understand presentation of some opportunities available for investing.

What is the difference between savings and investments?

Savings typically guarantee you a fixed return on your money, for example a savings account or cash ISA will set and pay a rate of interest. However, an investment is more long-term in its nature and aimed at generating a significantly greater return than savings can. But with the potentially higher risk, comes the potentially higher reward. Investments are known to regularly fluctuate in value depending on which companies or funds you hold within in your investments. With an investment, you may get less back then you invested.

Am I in the right position to consider investing?

Experts commonly suggest that you should be prepared to have your money held in investment for at least five years or more. This is so that the performance of your investment can ‘smooth out’. Therefore, prior to investing, you should ensure that you are financially secure and can cope without the money that you are considering investing. For example, if you are investing for a small holiday, then perhaps it is best to consider a cash ISA. However, if you are eyeing the potential for greater returns then investing is more suitable.

What are my options for investing?

There are a number of asset classes suitable for investing; these include gilts, corporate bonds, funds and shares. Each of the mentioned examples has a heighted risk respectively. For example, a corporate bond from a trusted company will typically pay you back a fixed rate of return, followed by your full deposit upon maturity of the bond. This contrasts to shares in a company, where the price of the shares will often change daily depending factors such as business performance. Because of the high volatility of shares, investment funds are popular with investors because they invest in a range of shares on your behalf and diversify the risk. For example, an emerging markets (areas such as China and India) fund may invest in up to 80 different company shares as opposed to just 1 company. Therefore the value of the investment isn’t solely reliable on just 1 company.

What is an investment fund?

Generally speaking, an investment fund pools together investors money and invests the pool of money into a variety of companies. For example, an investment fund may be called the European equities fund and it invests it solely into companies across Europe. Similarly, a more risky fund may focus on ‘emerging markets’ such as China with the hope of higher returns in the future.

Each fund is ‘produced’ by dedicated fund management companies and there are over 2,000 funds available in the market place. Some of the larger providers of funds include Invesco Perpetual, Jupiter, Blackrock and M&G. Each of the funds is managed by a dedicated team or ‘fund manager’ who uses their expertise to invest the pool of money in pursuit of higher returns.

How do I invest?

One of the common ways to invest is to hold investments in a ‘tax free’ Stocks and Shares ISA wrapper. A Stocks and Shares ISA is as ‘tax wrapper’ for investments, and each year you as an individual have a £10,680 allowance.

It is possible to open a Stocks and Shares ISA at your local bank. For example, a bank such as Barclays will offer you a number of ‘funds’ to place into your ISA tax wrapper depending on your attitude to risk. However banks will only provide you with a limited selection of funds, depending on what they deem best. But in reality, there are thousands of funds in existence. Similarly, a ‘self select’ ISA will allow you hold shares which you have ‘cherry picked’.

Therefore, ‘fund supermarkets’ have emerged which can give you access to thousands of funds and at a lower cost. For example, these fund supermarkets cut the initial charge of investing in the fund (which is usually up to 0.5% of the value of your deposit). The concept of a fund supermarket is very similar to that of a big supermarket.

These fund supermarkets work typically on an ‘execution only’ basis, meaning that they do not provide you with any form of personal advice. However, many will provide a great deal of research which is available to the general public.

How do I find advice?

Independent Financial Advisers (IFAs) are available to help you. An independent financial adviser will assess your personal situation, before making recommendations on what sort of investments you should be considering. There are websites available which list FSA authorised IFAs, however many people may find that friends and family can provide a solid recommendation.

In contrast to an adviser you will find at a bank, the premise of an IFA is that they shouldn’t usually be tied to a specific set of investment products and will help you make the best possible investment move. However, for this advice and support comes a fee.

Further information

Further and more detailed information can be found at the Investoo knowledge centre.

Understand the risks

The key principle of investing is to always understand the risks. The value of investments can fall as well as rise, and you may also get back less than you invested. Much of the literature produced by third parties should not be treated as a recommendation to buy or sell any particular investment product. You should always consider your own personal circumstance and seek the help of an IFA if you are not confident with your own investment decisions.