Investing may feel like something that belongs only to the financial experts, but you'd be wrong! We’ve answered a few of the initial questions you may have when you’re beginning to think about investing money for yourself to show you it's simpler than you think.
1. What is investing?
Although smug and irritating, the phrase “working smarter, not harder” deftly explains investing in four words. It’s about paying out money today in order to (ideally) receive a bigger payback in the future. You choose a commodity that should increase in value over time, so that in the future it will pay you back more that you put in.
There’s a whole ream of different ways to invest your money. You can invest in stocks, bonds, companies, real estate, of mutual funds, to name just a few.
2. Ok, now explain those things
Stocks: A stock is a share issued by a corporation. It doesn’t actually mean you own part of the company, but instead you own a ‘share’ of the company. It means you can receive a percentage of the dividends (which are the company’s profits). This amount obviously depends on how many shares you own. Crucially, you also have the right to sell your shares on to someone else if you so choose.
For example: You buy a stock for £1, and in 6 months it goes up to £1.10 - you’ve made 10p for doing nothing. You can either hold on to that share if you think the value will continue to increase, or if you want to, you can sell it on to someone else at the new higher value.
Bonds: There are a few different types of bonds, but in essence they are ‘loans’. Instead of buying a share of a company - as you do with stocks - you are instead agreeing to loan a company money. This money keeps their fires stoked and means they can make money and continue doing their thing, and in return for your loan the company will pay you back with a little interest. Just like you do when you take out a bank loan.
Because of the nature of what they are they’re more stable than stocks, which is good in one way, but it also means you don’t really get the ‘high risk high reward’ opportunities you do with stocks.
Companies and real estate: These two are pretty self-explanatory. You can choose to invest in a company you believe will do well, and you will see your investment increase if all goes to plan and the company does grow. However, (as will all investment), you must also be prepared for the eventuality that the company may bottom out and all your money could be lost in a moment.
The same goes for real estate: many people will put money into buying rental properties, holiday time shares, or even commercial building, as for many years real estate has been an asset that has either increased, or at the every least, held it value.
Mutual funds: Instead of just one share in one company, a mutual fund is an opportunity for you to invest in many different companies. You invest in the mutual fund, and in turn, the managers of the fund (be they human or robo) then invest your money on your behalf in a range of different shares.
3. Is investing risky?
Simple answer is: it can be. It depends what you invest in.
Historically, the best way of managing your risk has been to diversify your investments. Basically, "spreading your bets". By putting less money into each venture you gain less but also manage the risk of losing less.
Don’t invest in something you don’t fully understand. Get yourself read up about the terms and conditions of the investment you’re considering. If it’s a company then look into its history, it’s management, and read its forecasts. Make sure you know exactly what you’re doing with your money before you invest it.
If you don't know where to start then take a look at these 5 financial ebooks you should be reading to improve your financial literacy.
4. What’s the lowest risk investment option?
Remember that low risk usually means lower reward. Not that this is inherently a bad thing, because investing in safer options means your money is safer; it just usually means you many need to pay out more to see more of a return. You money may also be tied up for much longer periods of time in order to make returns. For example, some fixed annuities require a ‘surrender period’ (where you can’t access your cash) for up to 12 years. So when you put that money away, you need to forget about it for a long time.
5. How do I know if I should invest?
Of course that’s up to you, but there a few key things you should consider first.
Are you read up on investing?
Don’t even think about starting to invest until you really understand the options you are considering, be they stocks, shares, mutual funds, or anything else. Getting involved financially in something you don’t fully understand could cause you real chaos and financial trouble.
Are you financially stable?
Are you able to keep yourself financially steady on a continuous basis? (ie. you don’t drag yourself over the finish line at the end of the each month) Are you completely debt free? Do you have savings in the bank? And, most importantly, are you able to absorb the loss of your investment if it should happen, without throwing yourself into financial ruin or heavy debt?
If the answer to all of these is yes, then that’s great! You seem to be in a financially stable position.
Do you have an end goal?
Do you know exactly why you want to invest? Because this will affect the type of investment you make.
For example: If it’s for retirement then you will most likely want a safe, more long-term growth option. If you want it for short-term investments or potential high reward schemes, then you will need access to it all the time. Knowing what you want from your investment will help you choose the right investment option for you.
Investing with Oval lets you start your investment journey from as little as £100. You can choose from a range of investment options and check up on them whenever you want through your smartphone app.
Your capital is at risk, and past performance may not be a reliable indicator of future results. Oval Money is not permitted to provide financial advice, and if you have any questions please consult an expert.