Potential investors should not be put off from dipping a toe into the water – as long as they have around three months’ worth of expenditures saved in cash and they don’t need the investment money for at least five to ten years.
Stock market investments can go down as well as up. Financial advisors therefore encourage people to complete a simple risk assessment before starting to invest, based on a range of factors including the amount you want to invest, the timescale in which you expect a return, the scale of losses you would be prepared to accept over a certain period and your appetite for risk.
The FTSE 100 index (one of the main measures of stock market performance in the UK) has gone up by around 0.05% in the last year, 10% in the last 5 years and 88% in the last 10 years, according to figures on Google Finance. Interest rates have been so low in the last decade that your return from a cash savings account would have been much lower. And if you put £10 in one of the highest-paying savings accounts in the UK - currently at 1.45% according to Moneysupermarket - and left it there for 10 years at the same interest rate, your pot would only grow to £11.56, not taking inflation into account.
Once you know what the basics involve, you can make a much more informed choice and possibly even some financial gain, although remember that capital is at stake and that returns aren’t guaranteed.
Here's a list of basic investment terms that will get you up to speed in no time.
Asset classes
This term refers to the different types of investments that can go into your portfolio (your portfolio is your collection of investments), and the most common ones are stocks, bonds and commodities.
Stocks
Stocks are shares in companies that trade on the stock exchange. The share price will go up and down depending on supply and demand however, any number of different factors can affect this, including the company’s earnings and the general economy.
“Unless you’ve got a very specific risk appetite, I would say the majority of people should go into funds [see ‘funds’ below], not direct shares,” says Catherine. “Picking shares might be something investors could explore at a later stage.”
Bonds
While a stock represents a portion of equity in a company, a bond is a form of debt. The borrower, whether a company or a government, must pay your money back along with interest. In the bond world, the interest is known as a coupon and is a regular payment. Just like shares, the price of a bond can change every day. It is unusual for a retail investor to have enough money or the know-how to buy individual bonds, but bonds can make up a good chunk of retail investment funds.
Commodities
Gold, silver, oil, soybeans, wheat, livestock – there are dozens of sub-asset classes that fall into the commodities range. Generally speaking, commodities are at the higher risk end of the scale because their prices are more volatile. Retail investors, generally speaking, only have access to this asset class through a retail investment fund which is managed by a professional.
Funds
If you want to bypass picking individual stocks and bonds, you could invest your cash in a collective investment fund. The two main types are actively and passively managed funds.
Passive funds have one job – to mirror the performance of a certain market, whether that be the FTSE 100 (UK companies) or the S&P 500 (US companies). As an investor, you should expect the same return as that market over a given period (minus fees), as long as the fund is able to track the index very closely.
An active fund is run by a fund manager, whose job it is to buy and sell securities, with the aim of beating the market.
“In terms of funds, the general rule of thumb is that passive tracker funds will charge a lower fee as they are designed to replicate an index, such as the FTSE 100,” says chartered financial planner Lauren Peters of Fiducia Wealth Management. “Managed funds will charge a higher fee as the managers will attempt to add alpha [added value] by making tactical decisions to beat the market.”
Platform provider
This is the place where you can build your investment portfolio and hold it in one place. Think of it as a supermarket, advises Catherine.
“Do you want to go with a big brand like Tesco e.g. Hargreaves Lansdown, or a smaller player? On their shelves, you will find branded products, e.g individual securities and funds.”
Each platform will offer a different range of things to invest in and will charge a fee too.
Management fees
Look out for the OCF – the ongoing charge figure. This will apply if you buy any kind of fund yourself or if you’re part of a workplace pension scheme. You might also pay a fee to use an investment platform, or pay a separate dealing charge when buying and selling.
“Fees are not a terrible thing; they are a necessary part of an effective working market, but it does mean profits [from your investments] will need to cover the fees – and inflation – in order to make a real return,” says Lauren.
Investment apps
One of the easiest ways to invest is via an investment app. For example, MoneyBox, which directly integrates with Starling, allows people to round up their spare change into an ISA. There are many more apps with varying fees and portfolios, including Wealthify and Wealthsimple, both of which can be accessed through the Starling Marketplace. Some of them allow you to invest in ethical portfolios, open an ISA or a pension product on the platform, so it’s important to do your research.
“It is preferable that everyone takes some advice before investing in order to fully understand their attitude and capacity for risk,” adds Lauren. “Also, having a sound strategy in place will ensure you are investing with a desired outcome in mind instead of blindly chasing returns by overtrading and misunderstanding the fundamentals.”
Find out more about Catherine Morgan on her website.
