With many different investments on offer, choosing which might be best suited to you can seem daunting, especially if you’re new to investing. If you are considering investing, the very first investment you should make is some of your own time – to do your homework on what your money’s going into.
Following these five steps will help you to choose investments that suit your needs and aims, helping you to become a smarter investor over the long term.
1. Am I really ready to invest for the long term?
It’s important to get your immediate finances in order before you invest. Prioritise paying off any short-term debt, build an emergency cash fund and consider investing more via your workplace pension. Do not use your emergency cash fund to invest, clear any debts you have and never invest using a credit card. Interest and charges can mount up fast and are likely to exceed any investment returns that are made.
To read more about the importance of sorting out your day-to-day money matters before you begin investing, see our should you invest article.
Investing using a credit card?
If you are looking to invest over a fairly short time frame – perhaps up to three years – then you could consider a savings account. You could also look at other products which typically deliver slightly lower returns but put your money at generally very low risk. However, there is still risk of losing some of your investment if you need money immediately, depending on what the market is like.
Investments are affected by the wider economy, so the probability of positive returns increases the longer you hold them. There is no guarantee of this but the shorter the period the greater the chance of suffering losses.
If you're taking a longer-term view – for example over at least five years – and are prepared to put your money at greater risk, then you might look at investments that could offer higher returns. While some investors look for long-term growth from investing in property, others may choose to put their money in stocks and shares. This might give them to opportunity to generate long-term gains as the value of their shares increases – and sometimes income too – from dividends based on the company’s earnings.
Investments can be made directly or through funds to provide diversification. Read more about mainstream investments.
2. How does my investment choice affect what I might get back?
When you invest, it’s important to understand what you are actually buying into, and how this affects the chances of that investment making you money or suffering a loss.
Most people choosing to invest will invest in funds that spread risk across multiple companies, industries and even countries. Some people will invest in funds that spread across specific industries – but this can increase your concentration risk. If you’re buying shares in one company, it’s worthwhile learning about the industry the business operates in and how the company’s planning for future growth. Reading news articles about the company and its competitors, could help you to get a better feel for its prospects.
How your investment performs is always linked to how the share price of the individual company performs, as well as external factors such as world events and market sentiment. In the short term, this can make the prices volatile, and you may lose some of your capital if you need to exit the investment during a lower point than when you invested.
If instead you’re thinking of investing in a fund that spreads your money across many companies, then it’s worth getting to know which industries and markets your investment will be allocated to. While some funds invest in specific countries, others invest across whole regions or even globally. Read about the benefits of diversification.
3. How much risk am I exposing my money to?
Investing involves taking a degree of risk. Generally, the more risk you take, the higher the potential reward but also the higher potential for losses. It’s important that you work out how much risk you’re willing and able to take to help choose the right investments for your needs. Our article on risk and returns has more on this.
And with high-risk investments, like crypto, contracts for difference (CFDs) and mini-bonds, you should be prepared to lose all the money you’ve invested, should things go wrong.
In general terms, mainstream investments are broadly regarded as lower risk than higher-risk investments. Investing in high-risk investments could put you at greater risk of losing all the money you invest. Of course, there is still the risk that you could lose your money when investing in mainstream investments.
Investment funds are available to cover the full spectrum of risk and offer investors much greater diversification than buying a small number of shares directly. You can read more about the level of risk associated with individual funds by checking the 'key investor information documents' (sometimes call KIIDs) provided by fund management companies.
4. What’s the investment going to cost me in fees/charges?
You can expect an investment company to charge for services you use – after all, providing these costs them time and money. But as these charges can drag on your investment returns over time, it makes sense to understand the fees/charges. Comparing products from different providers can help you get good value for the investment services that best fit your needs.
Fees/charges come in two main forms:
Upfront fees – you pay when you invest
There is often an upfront fee involved when you buy certain investments, for example when buying shares through a platform or broker, and there may also be tax charges such as Stamp Duty (around 0.4%) to be paid.
When the time comes to sell your shares, you could also expect to pay another transaction fee. These transaction fees mean that making lots of small trades can often be costly in the long run. It’s always best to do your research before investing and be prepared to hold onto your investments for the long term.
Ongoing charges – you pay regularly, usually once a year
Other investments, such as buying into a fund, can involve paying ongoing management fees. It’s a good idea to compare the fees charged by different providers, bearing in mind that fees for more specialised funds – for example those investing actively in smaller companies – may often be higher than for the most popular products. Like buying any product or service, it’s important to make sure you’re getting the best deal, and not over-paying for a product that doesn’t meet your needs.
There are also a range of other fees you may encounter including platform fees, management fees, exit fees and advisor charges.
5. Is the company regulated? And what about the investment?
Before buying any investment it’s important to find out about the company offering it to you. An important first step is to check that the firm is regulated by us. You should also make sure that the firm is authorised to sell you the product they’re offering. Not all products or services sold by regulated firms are covered by FCA regulation.
In the UK, firms offering many financial services to you must be authorised by us. Check the Financial Services Register to see which firms we authorise and what they’re authorised to do.
Even if a firm is regulated, it can still provide unregulated activities, products or services that you can invest in. In general, if you use the services of a firm that is not authorised to provide them, you are likely to miss out on any possible protection from the FSCS or FOS.
When you invest, it’s your own hard-earned money that’s at stake.
So, it makes sense to take some time to research your investment options, to give yourself the best chance of success.
Investing involves at least some element of risk and it’s important to recognise that you won’t be protected simply if your investment performs badly.
Everyone’s motivations, objectives and means of researching investment options are unique and the five considerations above are by no means exhaustive. For many, getting advice from a Financial Adviser can be helpful.
Whichever route you choose when investing, learning about the risks and opportunities of any investments you are considering should help you to become a smarter investor over the long term.
Should you invest?
Tips on getting your immediate finances in order before you investSee our tips
Many investors favour them for peace of mindSee the advantages
Find out how to manage your risks while investing to maximise your gains and minimise your lossesUnderstand how it works