All investments come with some level of risk, so it’s important to understand how your money might be affected. Not every investment carries the same amount of risk, so the chance of gains or losses can be different depending on what you choose.

This guide will help you with:

• Learning the basics
  
• Understanding your financial goals
  
• Exploring your investment options
  
• Getting started and understanding the risks
  

Step 1: Learning the Basics of Investing

At its core, investing means using your money to buy something with the hope that it will grow in value. But there are no guarantees, and you might get back less than what you put in.

You don’t need a large amount of money to start investing. Begin with an amount you’re comfortable with.

There are different ways to invest. Common options include stocks, shares, and investment funds.

Step 2: Why People Invest

If you have savings and want to grow your money over time, investing might be worth considering.

You can also keep your savings in a cash account where you earn interest and have quick access to your money. But cash savings can lose value over time due to inflation.

The table below shows how inflation can reduce the value of £1,000 over time:

After…	2.5% Inflation	5.0% Inflation	7.5% Inflation	10.0% Inflation
5 years	£884	£784	£697	£621
20 year	£610	£377	£235	£149

While investing can give higher returns than cash, it also comes with more risk.

Step 3: What’s Your Reason for Investing?

Investing for Income
If you want to earn income from your investments, you can choose options that pay you regularly. For example, some stocks pay dividends, and bonds pay interest.

Investing for Growth
This means aiming for your investments to grow in value over time. For instance, if you buy shares and their prices go up, you could make a profit when you sell them.

Compound Growth
If you reinvest the income you earn from investments, your total investment can grow faster. This helps you reach your goals sooner because both your original money and the reinvested income can earn more over time.

Many investors aim for both income and growth. For example, someone may reinvest their income now and later sell investments to use the profit.

Step 4: Your Investment Options

Shares
Buying shares means owning a small part of a company. Shares are bought and sold on the stock market, and their prices can change often.

• Pros – Capital Gains: If the value of your shares goes up, you could make a profit over time. Shares often offer better long-term returns than cash savings, though not always.
  
• Cons – Capital Losses: If the company doesn’t grow or loses value, the price of its shares could drop, and you might lose money.
  

Funds
A fund combines your money with other investors’ money to buy a mix of assets like shares, bonds, and cash. This helps spread your risk.

• Pros – Diversification: By investing in many types of assets and markets, funds can lower your risk. If one asset does poorly, others may do better.
  
• Cons – Liquidity: Some funds, such as property funds, may need to sell assets before giving you your money back, which can cause delays.
  

Exchange Traded Funds (ETFs)
ETFs are traded like shares on the stock exchange. They invest in a variety of assets and aim to match the performance of an index, commodity, market sector, or currency.

• Pros – Lower Fees: ETFs often have lower fees because they cost less to manage.
  
• Cons – Performance: ETFs aim to follow the market, not beat it. So your returns will likely match the market but not exceed it.
  

Investment Trusts
An investment trust is a company that collects money from investors and uses it to buy a range of investments. They have different goals and mixes of shares and other assets.

• Pros – Potential Returns: These trusts can borrow money to invest more, which might lead to higher profits, but also higher risk.
  
• Cons – Price Volatility: The price of a trust can change depending on how people feel about how it’s being managed. If confidence is low, the price may drop.
  

Bonds and Gilts
Bonds and gilts are issued by companies or governments to raise money. When you invest in them, you’re lending your money in return for a fixed interest payment.

• Pros – Stability: These are often safer than stocks and may offer steady returns over time.
  
• Cons – Limited Growth: Bonds usually don’t grow as much in value as stocks. They can also be affected by interest rate changes, the economy, or currency changes.
  

Step 5: Are You Ready to Invest?

Before you invest, make sure you agree with all of the following:

• You have at least three to six months’ worth of income saved for emergencies or planned spending.
  
• You understand and accept that investing involves some level of risk.
  
• You are willing to leave your money invested for at least five years.
  
• You are not carrying a large amount of short-term debt, as it may cost you more in interest than you might earn through investing.
  
• You have done your own research and feel confident that now is the right time for you to invest.