Figuring out how to invest money and where to invest it can be complicated. With these tips, you'll be ready to invest in no time.
Investing involves setting aside cash to grow in “real terms”. That is, your money accumulates faster than inflation (increased costs of goods and services).
While all investments involve some level of risk, smart investing does not involve gambling. There is a difference between financial planning and get-rich-quick schemes. The greater the potential short-term rewards, the greater the risk of losing your investment.
If all of this sounds a little daunting to you, don't worry. This guide on how to start investing will walk you through every step, including some great advice from investment experts Rodney Hobson and Andrew Hallam.
What is investing?
When you invest, you buy assets with the expectation that the value will increase over time.
“Assets” include stocks, bonds, real estate, or even things like valuable collections or art. It also applies the likes of Bitcoin and NFTs. The goal is usually to buy low and sell high to make a profit.
It is remember that no investment is without risk. Some are less risky than others, but there is always a chance that your assets will decline in value.
The most common way to invest money is the stock market. When you buy stocks or shares, you are essentially buying a piece of a company (such as Apple, Amazon, Tesla or Tesco). If the value of the company increases, its share price will also increase.
Andrew Hallam told us:
If you're going to invest, buy assets that appreciate over time (investments which rise in value). Cars lose their value each year, so it's best to spend small amounts on depreciating assets (like cars) and more on assets that increase in value.
If you are going to invest, buy assets that appreciate over time (investments that increase in value). Cars lose value every year, so it's better to spend less on assets that depreciate (like cars) and more on assets that increase in value.
How to start investing
1.Set your investment goals
Before investing in the stock market, it is important to set some goals.
Do you want to build capital (through stocks that increase in value) or income (through dividends, for example)? Thinking of investing for your retirement or wanting to get your money back early?
Remember that investing is usually a long-term strategy. You'll often be looking at five to 10 years (if not longer).
If you know you'll need the money sooner (for example, to buy your first home), risking large amounts of money may not be the best idea. This is because the stock market is volatile. The longer you hold your investments in the stock market, the more time you have to ride out any downturns.
2.Figure out how mu
Figure out how much you want to invest
Once you've established your investment goals, it's time to start looking at how much you can afford to invest. While it's tempting to invest your entire service loan in stocks to make a quick buck, you should never invest more than you can afford to lose.
Buying stocks and shares is the most common way to invest money, but there are always risks involved. The market can go up and down, so it's better to leave your money in the stock market as long as possible (we'll explain why later).
Therefore, investments should not be seen as a way to make quick money. If you need money soon, like for a vacation, it is better not to risk it in the stock market. You never know what could happen. If the market crashes, you won't have enough time to recover.
3.Pick your investments
Choosing which stocks, shares or funds to buy can be a little overwhelming, especially when you're new to investing. But this is where research comes into play. Always make sure you know what you are investing in. Just because someone on Twitter said a certain stock is a good option, doesn't mean it's true.
There are different types of investments that you can make in the stock market. You can buy shares in individual companies, which is a more practical approach, or you can buy index funds (such as the S&P 500 or FTSE 100).
Index funds track the value of a group of stocks or bonds. For example, the S&P 500 tracks the top 500 companies in the US and the FTSE 100 tracks the top 100 companies in the UK.
Instead of buying a single stock of each company (which would be very expensive and time-consuming), you can invest in an index fund. Because your money is spread across many different companies, it's often seen as an easy, lower-risk form of investing.
Diversifying your portfolio is the best way to minimize risk. You can do this by investing in index funds, but also by spreading your investments across different markets, geographies and sectors. Even if one company or market loses value, you will have other companies and markets to offset the losses.
Andrew Hallam told us:
If you think that Warren Buffett and a slew of Economic Nobel Prize winners offer valuable advice (these guys aren't selling products) then you'll be keen to build a diversified, low-cost portfolio of tracker funds.
In the U.S., these are called index funds. They're extremely low-cost unit trusts that beat more than 90% of professional investors over 20-year study periods, after all fees, attrition, and taxes.
4.Open a Stocks & Shares ISA or brokerage account
Before you can buy your first investment, you need a brokerage account. It is an online platform where you can buy, sell and track your stocks and shares prices.
When choosing your brokerage account, make sure they offer the type of investments you want to buy. If you want to buy index funds, for example, a brokerage account should allow you to do so. You should also check the fees and ease of use, especially if you are new to investing.
If you're in the UK, you also have the option of opening a Stocks and Shares ISA. Like a Cash ISA, this account allows you to grow your money tax-free. You can add up to £20,000 to the account each year and any capital gains or dividend payments will be fully tax-free. This is a great option, especially if you plan to invest for a long time.
Obviously, you can also open a normal brokerage account. But remember that you will pay taxes on the income if you exceed the annual threshold. Even if you don't break that threshold any time soon, opening a Stocks and Shares ISA could save you a lot of money in the long run, especially if you let your investments grow over a long period of time.
To open a brokerage account, you will most likely need:
- identification test
- Your National Insurance Number
- Personal information (name, email, address, bank account, etc.).
5.Buy your investments
Before you buy any investment, do your research. Know what you're buying and whether it meets your investment goals.
When you're ready to buy your investments, log into your online brokerage account and search for the stock or fund you want to buy. Although all brokerage platforms work a little differently, buying stocks is pretty simple. Find the company or index fund you want to invest in and add the number of shares you want to buy.
When buying and selling stocks, you may need to choose between a market order or a limit order. Here are the differences.
- Market order. buy or sell a stock as soon as possible at the best available price
- Limit Order – Buy or sell a stock at a certain price or better.
By setting a limit order, you can get a better price for the stock, but it may take a little longer to buy.
Some brokerage accounts also allow you to set up automatic investments. This means you will automatically buy a number of shares/funds every month.
Keep track of your investments
Congratulations: Are you already an investor?
All you have to do is track your investments and sell them when you think the time is right. But if you have a long-term strategy, it may not be many years.
Obviously, you don't need to log into your brokerage account every day, but it's good practice to log in every few months.
Don't stress out when your investment drops a bit. The market is constantly going up and down. Remember to look at the big picture. But you can always re-evaluate your strategy if needed.
The way to make money on an investment is to sell a stock that has appreciated in value or receive dividend payments. If you don't keep your investments in stocks and shares ISAs, you will have to pay tax on your capital gains or dividends if you exceed
Is now a good time to invest?
Now that you know how to invest your money, you may be wondering if it's the right time to start. Since stock prices are constantly going up and down, you want to make sure you buy at the lowest price to maximize your profits.
A good investment is one where you understand exactly what your money is doing. You should never invest in something you don't understand. Just because someone on social media said a company would do well is no guarantee that it will actually increase in value. Always do your own research and never invest more than you can afford to lose.
When you spread your investments (like in an index fund) and leave them for several years, it's not necessarily a bad time to invest, just a bad time to sell.
The longer you leave your money in these low-risk investments, such as index funds, the more time you have to ride out any downturns. It's about timing the market, not timing the market.
If you look at the chart above, you can see the value of the FTSE 100 index fund (a collection of the 100 largest companies on the London Stock Exchange) since it was created in 1984.
Although it has experienced some ups and downs over the years (the 2008 financial crisis being number one and the onset of the COVID-19 pandemic being number two), the market has continued to recover and is still growing. plus:
That's why it's so important to give your investments time to grow. Your investments will likely decrease in value at some point. However, the longer you are willing to put them off, the better chance you have of them overcoming any depression.
Andrew Hallam told us:
If you're in your 20s, you can realistically make money for yourself before you die. Sure, you'll sell some to cover living expenses after retirement, but you don't want expenses locked into your money for the rest of your life.
If you'll need the money in a few months or years (if you're thinking of buying a house in a few years, for example), it's better to put it in a savings account or cash ISA/LISA. So you don't risk the market when you need money.
Other ways to invest your money
Besides the stock market, there are other places to invest your money, including:
1.Put cash in the bank
- Pros – low risk
- Cons low returns (usually less than inflation).
Putting your money in the bank appears to be a safe option.
However, cash alone is not a great investment. This is especially true of the incredibly low interest rates paid by banks and building societies. Interest rates are rarely higher than inflation, which means your money actually loses value. In other words, you will be able to buy less for the same amount.
Financial journalist Rodney Hobson told us:
Whatever you do, don't just keep your money under the mattress. That's where you lose the most money thanks to inflation. And if you get robbed, you could lose everything.
2.Buy and sell antiques, art, wines, collectables
- Pros – A fun way to invest if you're interested in the things you buy
- Cons – You must be an expert in what you sell and the value of the products is not guaranteed.
There are many things you can buy and sell for money.
You may already have some childhood toys that cost a lot of money. Just remember that the purchase of these types of items does not immediately generate income, and the income depends entirely on what someone is willing to pay for them.
You also need to be an expert in what you collect. Otherwise, someone who knows what they're doing can use it to their advantage.
A good starting strategy is to get desirable products where there are fewer buyers (eg Gumtree or car boot sales) and sell them where demand is high (eg eBay). For more tips, check out our guide to selling on eBay.
3.Invest in property
- Pros – Long-term stable investment
- Cons – Requires a lot of upfront costs and isn't very easy to sell if you need the money for something else.
For most people, the best investment to consider as soon as your income allows is to buy your own home.
Rodney Hobson told us:
Historically, home values rise faster than inflation, and one day you will pay off the mortgage. Rents go up every year and you always need a place to live.
Once you're on the property ladder, you can move up to more expensive properties as your income improves. As an investor, you can go one step further by buying a rent-to-own property that generates income and appreciates in value.
The big downsides to investing in property are that you have to commit a lot of money to each investment and it can take a long time to monitor the property and tenants. Be sure to set aside some money to cover those big utility bills (which come up whether you can afford them or not).
- Pros – Less risky than stocks
- Cons – Lower returns.
In short, a bond is a loan obtained by a government or company. Those issued by the UK government are known as gold-plated because the certificates used to have gold leaf to reassure investors of how safe they were. By buying bonds or gilts, you are technically lending them money.
But what is it to you? Bonds and gilts have a guaranteed interest rate and (usually) a maturity date. That's when the borrower buys them back at full price, known as par or face value.
A bond's yield (the amount of interest earned per £100 invested per year) will reflect how safe or risky the investment is for investors. The safer the debt (the less likely the borrower will repay), the lower the yield.
When interest rates are low, the price of bonds will rise, reducing the annual amount you will receive for your investment. But when interest rates are high, the market value of goes down.
Rodney Hobson told us:
Bonds issued by governments are known as sovereign debt and are generally considered safer than corporate debt because governments are less likely to fail than companies. However, remember that Argentina defaulted in 2005 and Greece has struggled to meet its obligations recently.
Unlike time savings accounts, you can sell your bonds at any time. But if you do it before the deadline, you may get less money
5.Put money in cryptocurrencies
- Pros – You can trade 24/7 and high returns are possible
- Cons –high risk, very volatile, not proven to be a solid long-term investment.
Cryptocurrencies like Bitcoin have become increasingly popular among young investors.
Especially on social media, it can seem like cryptocurrencies are a get-rich-quick scheme. And while you can make money from cryptocurrencies, the market is incredibly volatile and the risks involved are huge.
However, Bitcoin is not the only cryptocurrency you can invest in. There are hundreds! Obviously, some are even more volatile than Bitcoin, so it is very important to know the risks before investing in Bitcoin or other cryptocurrencies.
If you haven't heard of Bitcoin before, check out our comprehensive guide that explains what Bitcoin is and how to buy it.
Do you need extra money to invest? We have listed some quick ways to earn money.