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Investing for beginners

Choosing to invest for the first time can be confusing. Here, we'll cover the basics...

With low interest rates, more people are starting to invest to help them grow their money and get set up for the future.

But unlike saving, there are no guarantees. So if you're thinking about investing, it's important to learn the basics and work out whether it's right for you. This simple guide covers the main types of investments, what you can expect and some rules to remember.

What is investing?

Investing means setting some of your money aside for the future and putting it to work for you. When you invest, you're buying into something you believe will increase in value over time. 

Investing has the potential to generate a better return than a savings account in the long run. But the value of any investment can and will jump around, and it's possible you could get back less than you put in.

What can you invest in? Well, from the more common types of investments – such as shares, property or gold, to the more specialist – such as art, wine or cryptocurrencies – the answer is almost anything.

Rather than trying to explain the entire investment universe, let's focus on 2 well-known ways to invest: funds and shares.

What are funds?

Funds are a ready-made basket of investments. When you invest in funds , you're buying into a mix of assets, which may include shares, property, government bonds and cash. Funds save you from trying to pick individual investments you think will perform best.

The great thing about funds is you're not putting all your eggs into one basket. Instead, your money goes into a range of investments. This is known as diversification and it can be an effective way to manage risk. If some of the investments in the fund perform badly over a certain period, others may perform well, which can make the overall returns of the fund smoother over time. 

There are 2 main types of fund:

  • an active or multi-asset fund is run by a professional fund manager who chooses which shares, bonds or other assets to hold and monitors them on your behalf. You pay extra for the fund manager's expertise with the aim of receiving returns above a specific market index – for example, the FTSE 100
  • a passive fund or index fund simply follows or tracks a given market or index. As there is no active involvement from the fund manager, passive funds generally charge less in fees

Funds vary in risk from 'cautious' funds at the lower-risk end of the scale to 'adventurous' at the higher-risk end. The longer you're planning to invest for, the more adventurous a fund you may want to consider, as you'll have more time to recover from any periods of poor performance. The sooner you're likely to cash in your investment, the less time you'll have to recover from any dips so you may want to choose more conservative funds.

What are shares?

Shares are units of ownership in a company. When you buy shares, you're effectively buying a small stake in a company. Companies sell shares to raise money, which they use to expand their business. Investors, known as shareholders, are then free to buy and sell some or all of those shares on the stock market at any time.

If the company performs well - or is expected to perform well - demand for its shares will generally increase, pushing its share price up. If the company does - or is expected to do - badly, its share price will generally drop in price. Interest rates and the wider economy can also have an impact on share prices.

As a shareholder, the value of your investment rises and falls with the share price. So while the money you invest has the potential to grow, it could also fall in value.

What do you want from an investment?

There are 2 main ways you might make money from an investment: growth and income. In the case of shares, this would mean rising share prices (growth), or dividends (income) – a portion of profits that companies pay out to shareholders.

Funds are typically badged as either 'accumulation' or 'income':

  • accumulation funds – the income generated is reinvested within the fund meaning your investment would be more likely to grow in value over time
  • income funds – any income the fund generates will be paid directly to you

Investing for growth could be good if you're able to invest over a longer period, as accumulation funds may provide you with greater returns in the long term. 

Investing for income could be a good shorter-term strategy, particularly if you're nearing or in retirement. By choosing funds that pay dividends, you could receive regular payments to boost your existing income or pension.

If you're considering shares, you also need to decide whether you're aiming for growth, income, or both. Keep in mind, investing in shares can take a lot of research and you'd need to hold a balance of different stocks to mitigate the risk of losing money with one particular company.

Is investing right for you?

To figure this out, start by asking yourself a few questions.

  1. What's your current financial position?

    If you've got unsecured interest-bearing debts, such as credit cards and loans, you should pay them off – and build up some savings – before you start investing. 


    Ideally you'd have an emergency savings fund worth 6 months of your living costs first. This way, you'd have money available to cover unexpected costs, without needing to dip into your investments.

  2. What are your goals?

    If you're trying to build up enough money to cover the cost of a new car, a holiday or a wedding in the short term, then investing is probably not the right option. 


    But if you're putting money away for something at least 5 years away – such as a child's education or more flexibility later in life  – then investing may be right for you. 


    The sooner you start, and the longer you can leave your money invested, the more time it has to grow and recover from any bad periods along the way.

  3. How do you feel about risk?

    No investment is risk free. You're putting your money into something you believe will go up in value but there are no guarantees. 


    Risk and reward go hand in hand. As a general rule of thumb, higher-risk investments, including shares, have the potential to give you higher rewards. Lower-risk investments tend to equal lower rewards. A savings account could be classed as a very low-risk investment. 


    You can start by investing very little. So starting small could be a good way to dip your toe in the water. Then you can watch what happens to your investment – and invest more later if you want to. 

Ready to take the next step? Read how to start investing

Takeaway investing tips for beginners

  1. Investing is for the long term: you should be willing to leave your money invested for at least 5 years. The longer you leave your money invested, the more time it has to grow and recover from any market dips.
  2. Risk and reward go hand in hand: the higher the potential rewards on offer, the higher the risk of losses.
  3. You don't need to pick your own stocks: This is why many first-time investors choose to begin with funds.
  4. Diversification is key: it's important to spread your money across multiple investments to lessen the impact of one performing badly.
  5. Start as early as you can: once you've got your finances in order – the sooner you start investing the better, as your money will have more time to grow.

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HSBC Bank plc, Jersey Branch has prepared this article based on publicly available information at the time of preparation from sources it believes to be reliable but it has not independently verified such information.

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You should consult your professional advisor in your jurisdiction if you have any questions regarding the contents of this article.