How to get started with investing
Have you ever thought about starting your investing journey but unsure where to start? Well, in this article we unpack those first few steps to take when getting ready to make an investment.
When people think of investing, they typically think of glass-fronted office buildings, well-suited bankers in suits and movies like The Big Short (side note: we would recommend this as both an entertaining watch and an insightful commentary on the 2008 financial crisis). In this article, we explain how ordinary people can practically get started with investing.
Why do people invest?
- Inflation: Inflation is the gradual increase in prices over time. As prices rise, the real value of our savings falls because the same amount of money will buy us less and less as time goes on. Therefore, one of the main aims of investing is to keep up with inflation.
- Interest rates: Earning interest on our savings has typically been how people grow their savings and counter inflation. However, interest rates around the world are currently at near-historic lows, meaning that interest paid on savings amounts to very little - and not enough to keep up with inflation, which many governments try to keep at 2% per annum.
What sort of assets can people invest in?
Investing is essentially buying assets that may appreciate (that is, increase in value) over time. The most common assets that people invest in include shares, bonds and property.
- Shares: as we explained further in this article, shares are effectively slices of a company that entitle their owner to receive a share of the company’s profits. Individual share prices go up and down depending on the market’s perception of a particular company’s performance.
- Bonds: these are a form of debt that investors can buy. If a company or country wants to borrow money, they can issue bonds, which are legal contracts that require the company to pay a bond investor a fixed annual payment and then pay back the entire sum of money at the end of an agreed period. Bonds are traded on exchanges like stocks.
- Property: this is probably the most commonly understood asset. Typically, most people invest in property by purchasing a home. However, it is also possible to buy shares in companies or funds that themselves invest in property, which allows investors to benefit from the underlying property without actually owning it themselves.
How much should people invest?
All investors should first be aware that the value of any investment can go up or down over time; as such, while some investments are riskier than others, all investments carry risk. We will discuss the topic of risk in detail in a later article, so keep an eye out for this.
Therefore, investors need to first determine how much money they can afford to invest. This is a highly personal decision that will be linked to how much someone earns, whether they already have any savings, and what level of risk they feel comfortable with.
If you have any personal debt (such as credit card debt or personal loans) you should always prioritise paying that off first (with the exception of UK student loans) before setting out on your investing journey. It is also sensible to put aside some savings for a rainy day or emergency fund as well as any other short term financial goals you may have.
Once you have set aside any savings you may want access to in the short term, you could then assess how much you are willing to set aside for long-term investment opportunities. It’s then time to open an account with a broker.
What is a broker?
In this article, we explained that shares and other securities are traded on exchanges. However, investors don’t typically buy and sell shares directly from exchanges - instead they do so via brokers.
A broker is an intermediary or third party that facilitates the trading of securities on behalf of investors, whether they are retail (i.e. ordinary people who invest) or professional investors.
Investors need to open an account with a broker in order to start investing. Different brokers offer different investment products to investors (e.g. the ability to buy foreign shares and different funds), so investors should take care to choose a broker that meets their investment goals.
What are ISAs?
Most brokers will offer a particular type of account for retail investors based in the UK called a Stocks & Shares Individual Savings Account (ISA), which offers helpful tax benefits.
The UK government introduced ISAs to encourage the public to save and invest by offering tax benefits. There are several types of ISA: Cash, Stocks & Shares, Lifetime and Help-to-Buy. Each type of ISA has its own benefits but only Stocks and Shares ISAs are the subject of this article.
Retail investors can pay up to a maximum of £20,000 a year (in the 2020/21 financial year) into any Stocks and Shares ISA that they have. Investors can deposit money into more than one type of ISA in a financial year, but cannot open or pay into more than one ISA of the same type in the same year.
The main benefit of a Stocks & Shares ISA is that any investment gains are free from capital gains tax. Capital gains tax is a tax that the government levies on profits made from the sale of investments. Therefore, using an ISA rather than a general investment account enables significant tax savings over time.
Since you can only open one ISA in any one year, it’s worth taking care to open an ISA with a broker that offers investment products that align with your personal investment goals.