Simply speaking, investment is the act of putting your money into a company or an opportunity with the expectation that you will receive back more than you put in.
Depending on your situation, and what you hope to gain from your investment, there are different options available to you. However, before you begin to even think about starting your investment journey, make sure you can answer these four simple questions.
1. Why should I invest?
The easy answer to that question is: so that you can make your money work for you. Investing money allows you to potentially ‘grow’ your money without having to go out and work a double shift for it.
There are, broadly speaking, two types of investor:
Type A: High-risk, high return.
Type A investors are those who invest in opportunities or assets where there is a high percentage of chance that the investment will under-perform, or that their capital will be lost completely. However, because of the high level of risk these opportunities very often offer larger potential returns. Type A investors tend to be individuals looking for a high pay out, or have additional capital they can rely on if their investment goes bust.
Examples of high-risk, high return stocks are biotechnology stocks (the biotech industry is involved in the development of new and experimental drugs). This type of stock is risky because, although the potential payouts are huge, the general failure rate of new drugs is 90%.
Type B: Low-risk, low return
While low-risk investment doesn’t always necessarily mean low return, Type B investors are those who invest in assets that have a lower risk of losing their capital. The downside of this, of course, is that the rewards from this type of investment tend to be a lot more modest than those that are high risk. A Type B investor is usually someone who is investing in order to reap the benefits later on for their pension and twilight years.
Examples of low-risk investment are Gilts. These are bonds issued and backed by the British government.
You need to decide which type of investor you’re going to be, and what your reasons are for investing before you make your first investment.
2. How much should I invest?
Again, this question has a simple initial answer: no more than you can afford to lose.
This comes back to what kind of investor you are. Remember that if you decide you want to be investor ‘A’ (high-risk, high return) then you need to remember that the capital you invest may very likely be lost, despite the potential of a ‘big win’. Keep this in mind when deciding how much money you can afford to plough into a venture.
If you’re Type B, the long term, low-risk investor, then you may need to invest more money in order to make substantial returns. However, don’t be fooled into thinking that low-risk means ‘no-risk’. No investment is ‘no-risk’, and so you should always be aware of how much you can afford to lose before you invest anything.
One thing you should always keep clear in your mind is that investments are not savings. Once you have invested your money, depending on the asset, it may be difficult to withdraw it at will. You also cannot guarantee that the market will swing in your favour and your investments will grow. This means that once it is invested you should no longer rely on it as a source of capital in an emergency.
3. Which are safer, bonds or stocks?
As detailed in our post Investing: the basics, bonds and stocks are different investment options.
Whereas a stock is a share issued by a corporation, a bond is essentially a loan. When you buy a stock you are (in general terms) buying a share of the company itself. With bonds on the other hand, you are actually agreeing to loan a company money.
For this reason, bonds are traditionally seen as the ‘safer’ investment option. The money you make on a bond is essentially the company paying you interest on your loans, just as you have to pay on your own credit card or bank loans.
They are not the same as stocks, which rise in proportion to the value of the company on the stock market. For this reason they are more steady and reliable than stocks, but lack the ‘high risk, high return’ element.
4. Should I choose my own stocks?
This is really down to you. With the golden age of the Internet you can do a lot of thorough research and make your own informed decisions. If there are stocks you really feel passionately about buying, then by all means invest. However, don’t expect to ‘beat the market’ in this way.
It is worth noting though, that the job of a stockbroker exists purely because they are the go to experts on all things stock. You wouldn’t perform your own surgery; you’d look for an expert surgeon. The same goes for buying stocks. Why risk buying your own in a market you don’t fully understand, when there are experts you can seek advice from.
With the new investment section in the Oval app you can invest in a number of different stocks that have been subdivided into categories for your benefit. For example, our “Women at the table” investment fund allows you to invest in companies that ensure that at least 20% of board members are women. Perfect for experienced or first time investors, the Oval investment section lets you invest in and follow the stocks of your choice.
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.