So…what the hell is investing anyways?! As part of our “quickie” series, we aim to give you big ideas in a quick read time. Let’s go…
READ TIME: 2 – 3 MINUTES
To invest or not to invest…
So you’re intrigued by investing, but you’ve got no flippin idea what it is, beyond what you’ve seen in Wolf of Wall Street and The Big Short. Investing in the real world, by real people, isn’t really like that. You’ll either be pleased or gutted to hear that!
Investing is essentially about individuals and institutions having a stake in companies, governments and certain economic sectors – and trying to get a financial return on that stake to meet your long-term #goals.
What’s the difference between saving and investing?
We all gotta save, not least so we can access some money quickly in an emergency without going into debt. But the rate you’ll get for saving at the moment is pretty off, and mostly below the rate of inflation. That means, in real terms, your money is actually going dowwwnnn. That doesn’t matter if you’re just building a kitty for more short-term needs (replacing a broken iron or a holiday next month). But for the long-term, investing your money in the stock market means you have a chance of getting a decent bung on top of your money.
It is not guaranteed. Your money can go down as well as up. We’re talking about the stock market’s track record here, which isn’t gospel. But that track record *suggests* that we all need to diversify and think about making our money work a lil’ bit harder. Check out the different investment styles available…
Companies need to raise cash from investors to fund their activities. Investors range from huge institutions down to individuals investing in their lunch break. So what are the incentives? The two main cherries are capital growth and dividends. The first is about growing the value of your initial investment, but the second is basically cashback a couple of times a year to keep you in the game. If you invest in so-called “dividend heroes”, you’re getting 3 – 5% yield – that’s a lot better than even the average rates on savings accounts right now. Divis are usually paid out by so-called defensive companies, who tend to do okay in most economic conditions because their products/services aren’t linked to consumer demand, which can go pear-shaped in uncertain times.
Going for growth
If you’re looking to grow your initial investment, it’s a long game. You can minimise the risks by staying invested for at least five years, giving you more time to see out the highs and lows of markets and hopefully come out the other side with a return. It always helps to know WHY you’re investing – maybe for a home in five years time or your retirement way off in the future – as that will guide how much risk you can take. Less than five years? Play safe with cash. Ten years or more? Invest in riskier asset classes like stocks. But never invest anything you couldn’t afford to lose.
DIY homeboy (or girl!)
Feeling adventurous? Why not experiment with Fantasy Fund Investor. You can “invest” an imaginary £15,000 allowance in individual shares and funds and track their performance over time. Remember that you need a certain number of shares in different companies, operating in different bits of the economy, to spread your risk. You don’t want to bet on one firm that goes belly-up! We’re talking about diversification. If you don’t know where to begin, a fund or investment trust is your best bet. An active fund employs a manager to pick the best options and a tracker fund is simply tied to a number of companies on an index to capture its returns. Trackers are usually cheaper, but some active “star” managers justify their higher charges in souped-up returns.
DISCLAIMER: This isn’t financial advice and it is by no means comprehensive or detailed. It is designed to be a starting point so you can investigate which options will be best for you. Please do check out other guides and investment analysis peppered throughout this blog and elsewhere online – I’ve put some links below (all are independently chosen and not paid for). Always keep investing risks at the forefront of your brain-box (the biggest being that you might not get back what you put in). Make sure that your investments reflect how much risk you’re comfortable with.