Beginner guide to investing

Getting started with share dealing and investing can be a bit overwhelming. So we’ve put together a few basic tips to help you on your way.

This guide will help you

  • Understand investing basics by looking at share dealing
  • Learn about the different reasons to invest
  • Understand risks associated with investing
  • Ensure you are ready to get started with investing

1. Why invest? 

Interest rates are at historically low levels, which means leaving money in standard savings and current accounts generates very little by way of yield. Savings rates are exceptionally low and in 2020 NS&I is reducing the rate it pays to savers, which has prompted many retail investors to open share dealing accounts.  

Combined with low interest rates which offer limited returns, inflation can simultaneously eat away at your money in real terms. 

For example, assuming inflation remains stable at 2.5%, after 5 years £1,000 would be worth just £884. After 20 years it would be worth just £610 in real terms. Of course, investing in shares carries more risk than leaving money in the bank. 

 The value of shares bought through a share dealing account can fall as well as rise, which could mean that you get back less than you originally put in. Please ensure you fully understand the risks involved and manage your exposure. It is always the case that past performance is no guarantee of future results.

 

2. What’s your goal? 

There are traditionally two types of investors; those who invest for income and those who invest for growth. Increasingly there are also those who like to make short-term bets on shares rising and falling – this is called trading. If that sounds more like your thing, then head to Marketsx where you can find information on trading CFDs and spread betting. 

Here we want to focus on investing – that is, buying and owning physical shares.  

Income vs Growth

Income: Many people choose to invest in shares to generate additional income. They can receive this income by way of dividends, which owners of shares are entitled to whenever a company returns cash to shareholders. If a company is valued at £1 per share and pays out 4p in dividends over a year, it would have a dividend yield of 4%. However, during that time the share price could fall to 50p, in which case the yield would jump to 8% – however the shares themselves would be worth a lot less. If the shares rose to £2, the dividend yield would fall to 2%. Companies that usually pay dividends may however decide to stop payments if they are going through a period of weakness – for instance dozens of large FTSE companies suspended dividends as a result of the coronavirus pandemic in 2020. 

Growth: Growth investors typically go for shares they think will rise in value, resulting in a capital gain, or capital appreciation. They are less concerned about generating steady income returns from dividends and more about seeing the value of the shares go up. The risk as with any investment, is that the value of the shares (or capital) goes down. 

3. What are the risks?

All investments come with risk – the value of your investments can fall over time. Individual shares can fall dramatically, which is why diversification is considered so important for investors. Share prices can fall, reducing the value of your investments. Dividends may not be paid as regularly as hoped.

4. Are you ready?

Ready to get started?

Few basic pointers:

  • You should never risk money that you cannot afford to lose
  • You are willing to accept that the value of your investments can go down as well as up
  • There are no guaranteed returns from investing
  • You have income or savings sufficient to fund your account (you can start investing from as little as €/£/$50)

Want to learn more? Find out more about investing with our other guides.

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