how to invest money - beginners guide

Investing for beginners

How to start investing

Are you thinking about investing for the first time? Our guide takes you through the best ways to start investing – including how to invest money, where to buy shares and funds, and how much risk to take. Alternatively, if you know what you're looking for, see our other full guides on Stocks & Shares ISAs, Funds and share dealing

There are no guarantees when you're investing

Investing is a long way from putting your cash in a bank account where it sits to earn interest. An investment is a gamble: instead of the security of guaranteed returns, you're taking a risk with your money. This means your money can go up as well as down in value. 

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Investing is a gamble, you're taking a risk with your money

Any form of investing is essentially a gamble. While you could win small or win big, you could lose small or lose big – and end up empty-handed. It's therefore very different to a savings account as you could get back less than you put in, or even lose it all. 

For most, investing means putting money in the stock market

There are many ways you can choose to invest, from the most mainstream (shares, bonds, funds, government bonds/gilts, UK property market) to the rather more exotic (farmland, vintage cars, wine, art, new technology firms). This guide is first and foremost about investing in stock markets as it's often people's first experience of investing – buying shares in one or more company with the aim of making a profit.

While the concept of stock markets may trigger images of young brokers yelling "Buy! Sell!", heads in hands one minute and fist-pumping the next, the reality of long-term investing tends to be rather more mundane – pick a few shares or funds, keep an eye on them and then cash them in when you need to.

This is not the racy, glamorous or high-adrenaline action you see in Hollywood films where fortunes are made and lost in minutes – and thank goodness.

For the vast majority, it's about nurturing a reasonable and calm attitude to the stock market in a bid to generate decent investment returns that can weather downturns and ride out wild surges.  

A stock exchange is like a supermarket where you can buy or sell shares

A share is simply a divided-up unit of the value of a company. For example, if a company is worth £100 million, and there are 50 million shares, then each share is worth £2 (usually listed as 200p). 

Companies issue shares to raise money, often for growth, and investors (that's you) buy shares in businesses because they believe the company will do well and want to 'share' in its success. They then own a tiny slice of that company and become a 'shareholder'. Shares are listed on an 'index' and the UK's biggest is the FTSE 100 – the 100 largest firms.

Any buying and selling of shares is made via a stock exchange – the London Stock Exchange (LSE) is the primary one in the UK. Here, those selling (the company itself or existing shareholders) are connected to those looking to buy (individual investors or professionals such as pension providers or fund managers) where a price and quantity can be agreed. 

Why does a company share price rise and fall?

The price is determined by supply and demand from prospective buyers and sellers at any particular time – high demand will drive up the cost (while low demand will do the opposite). 

This demand can be influenced by many factors such as financial results (if a company doubles its growth in a year and prospects look rosy, then its price will likely rise), the UK's economic health and so-called 'sentiment', ie, if City buyers think a firm will struggle, its price can fall. Though it's sometimes linked to some surprising things – footballer Cristiano Ronaldo famously knocked billions of pounds off Coca Cola's value by favouring water over it at a press conference.

Shares can pay dividends too

There are two ways you make money from investing. One is when the shares increase in value between you buying and selling, the other is when they pay dividends.

These are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you – it could be on a regular basis or as a one-off. And just as you have a personal savings allowance for interest on savings, you also have a dividends allowance each tax year where the first £2,000 you receive is tax-free. See our Tax Rates guide for full info. 

How does a company get listed on the stock exchange?

For a company to make its shares available for anyone to buy it needs to 'go public' – becoming a listed company on a public stock exchange. 

This involves hiring an adviser – usually an investment bank – to draw up a so-called 'admission document'. This sets out why the firm wants to list, its targets for expansion, and a long-term strategy. Once a level of interest from backers is set, an initial share price is agreed, and trading can begin.

You can make money, but you can also lose it all – there are no guarantees

With savings rates hovering at historically low levels, the incentive to look elsewhere for decent returns is strong. Most wannabe investors will ask 'What kind of growth can I expect from investing?'  – the very reason behind most people's decision to put their cash into the stock market. Yet this of course is an impossible question. We, nor anyone else, can tell you what you will get (don't believe anyone who says they know – they're lying).

Over the long run, historically stocks and shares have outperformed money in savings accounts. However the actual rate of return depends on many factors including (but not limited to) the selection of shares or funds you hold in your portfolio, the length of time you hold them, the total amount of fees and charges you'll pay, and – ultimately – how the market performs.

Yet essentially there are two main figures you need to consider – the price at which you buy and the price at which you sell. The difference, minus any fees, is your profit or loss. Remember investing is risky and any money you put in could fall in value. Put bluntly, you could lose it all. There's a reason you'll see the below statement on investment sites – you've no guarantee your investment is going to do well.

Past performance is no indicator of future success 

There is no way to predict the future, so most investors look to the past for what to expect. Yet this in itself has obvious risks. Even a company with a stable stock market performance can fall into trouble, and quickly. You just need to look at the knock on impact of the coronavirus pandemic or 2007/8 credit crunch to see how sudden things can change.

According to investing site Vanquard, the average annual rate of return for the FTSE all-share index was 9.9% between 1988 and 2018. Yet this average masks annual returns of +35% (in 1998) and -30% (in 2011), so even average returns can be deceptive.

It's for this reason investing should be considered a long-term option. As a rule of thumb, five years usually allows enough time to ride out any bumps in the market that might see you make a loss on your money. But always take expected rates of return with a large pinch of salt.

Only you can decide if investing is right for you

To invest, or not to invest, that is the question. Yet this really is a personal call, as only you will know how much you're willing to risk – we can't tell you whether investing is right for you. But if you're going to do it, and are sure you could afford to potentially lose the amount you invest, here are some key points to consider.

You should never invest more than you can afford to lose

Too many people think you need to have a load of cash to be able to invest in the stock market – you don't, and many smaller investors who 'drip-feed' in small sums on a regular basis can do much better than those who simply dump a big lump sum into the market.

As a rule of thumb, you should never invest more than you can afford to lose. This is because, in the event of a stock market crash, you could face losing a huge chunk of your wealth if you have too much of your money invested. Also, as we say above, many financial advisers would suggest you invest for at least five years to ride out any bumps in the market. So if you know you're going to need access to your money in this time, then perhaps investing isn't the right route for you.

Many fund managers allow you to invest a regular small monthly sum – eg, £25 a month – which will help build up a larger sum over time, as well as potentially being more manageable for your finances. Though if you've built up a nest-egg and are fed up with low savings rates, putting a chunk of it (that you don't need to rely on for living expenses and could afford to lose) on the stock market could be a decent way to try to earn bigger returns.

If you've decided investing is not for you, or for any amounts you don't invest, see our Top Savings Accounts and Top Cash ISAs guides to ensure you're getting the best rate possible.

Take a good, honest look at your finances – don't invest if you're in debt

If you're struggling to keep up with credit card payments, say, or have taken on an expensive remortgage and have little savings, it's time to step back and think again – gambling on stock markets could be bad for your financial health.

This might sound like basic housekeeping, but the lure of quick gains in the stock market can prevent many people from seeing how dire their overall financial situation might be.

If this is you, it's far better to try to sort out your personal debts than turn the risk of making them far worse. See our Debt Help guides and tools to help you manage your debt.  

Be careful if somebody offers you advice

If a friend has suggested a share tip in the pub, or a family member or friend has suggested you "bung a few quid" into a hot share or fund that is currently – in industry jargon – "shooting the lights out", it's probably best to think twice unless you've money to spare that you can afford to lose.

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How to start investing in stocks

If you've read all the warnings above and decided investing is right for you, we'll take you through the cheapest ways to get started. So if you're going to do it, and are sure you could afford to potentially lose the amount you invest, here are some key rules to consider. 

ALWAYS remember the golden rules of investing
 

  1. The greater return you want, the more risk you'll usually have to accept.

  2. Don't put all your eggs in one basket. Try to diversify as much as you can to lower your risk exposure, ie, invest in different companies, industries and regions.

  3. If you're saving over the short term, it's wise not to take too much of a risk. It's recommended you invest for at least five years. If you can't, it's often best to steer clear of investing and leave your money in a savings account.

  4. Review your portfolio. A share might be a dud or you might not be willing to take as many risks as you did before. If you don't review your portfolio regularly, you could end up with a share account which loses money.

  5. Don't panic. Investments can go down as well as up. Don't be tempted to sell or buy shares just because everyone else is.

Funds are usually a good place for beginners to start 

When it comes to choosing where to invest your cash, you've three main options – choose the individual shares yourself, pick a fund which contains a collection of shares selected by someone else, or both. See our Guide to Funds for full help, but in summary... 

A fund is where lots of investors pool their money together to invest in lots of different shares

A fund is simply another way to buy shares – but instead of you buying a slice of a company directly, you give your cash to a specialist manager who pools it with money from other investors (like you) to go and buy a job lot of shares in a stock market.

Each fund is made up of 'units' so if you want to invest, you'll need to buy units – and these come at a cost which varies from day to day.

The value of each unit will rise or fall (or stay the same, of course) depending on demand in the market for the fund. Say you want to invest £1,000 in a fund; if each fund unit costs £2, you can buy 500 units. Six months later, if each unit is now worth £2.50, your investment is worth £1,250.

Funds can invest in almost anything – countries, energy, gold, oil, even debt

All funds have a theme – anything from geography (European, Japanese, emerging markets), industry (green companies, utility firms, industrial businesses), types of investment (shares, corporate bonds, gilts), to the size of the company. What you choose will be down to your attitude to risk.

Say the fund focuses on 'fledgling biotech companies in emerging markets', all the elements involve a high degree of uncertainty. So if it goes well you could be in for massive gains, but if it goes badly, massive losses. 

Alternatively, it could be a FTSE 100 tracker, where the fund simply invests in the UK's 100 biggest companies, and therefore is much more mainstream. Here, while there can still be substantial ups and downs, the fluctuations are likely to be smaller. 

The cheapest way to invest in stocks is through a website, often called a platform

The easiest and cheapest way to invest is via an online platform, which allow you to buy shares and/or funds. It's actually a two-stage process. First you need to pick which platform to buy your shares or funds from, then you need to decide what investments to buy.

Once you have an account, you simply search for the share you want to buy and choose a quantity or value – whichever you choose, you need to have enough money in your dealing account to cover both this and any dealing charges. Accept the quote it generates and the shares will then show in your account with your chosen platform (your account and the shares in it are often known as your portfolio).

Our top-pick online platforms

As a general rule, you'll be charged for using the platform and buying the investment – the platform fee is charged by the platform you choose, the company buying the shares on your behalf or running the funds will be charging you for its service. So it's a combination of the two factors that needs to be considered.

Our top-pick platforms vary based on the type of investment you're looking to do. If you know what you're after, the links below will take you straight to that guide for full help. Otherwise read on for a summary of each to help you decide.  

Stocks and Shares ISA – should ALWAYS be your first port of call

If you're new to investing, an ISA should be your preferred route for the first £20,000 (the current ISA limit) as any gains from investing are tax-free.

If you've more to invest, put the first £20,000 into an ISA and then use a standalone dealing account for the rest.

See our top pick platforms and full info:Stocks & Shares ISA

Funds – generally less risky than buying individual shares

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As funds often include a variety of shares or assets, and the fund manager is working on behalf of a group of investors for a fee, it's usually considered a less risky route into investing compared to buying individual shares, where you shoulder the risk alone.

Though you'll need to factor in fees – such as platform charges and fund management costs – as these can eat into your investment. 

See our top pick platforms and full info:Fund need-to-knows

Share dealing – if you want to choose which shares to buy/sell

If you're confident you know what you're doing, or want to be able to choose which shares to add to your portfolio, then these platforms let you buy shares from any listed company.

Again you'll need to factor in fees – the main ones here are usually the charge to have an account with the platform and a fee each time you buy or sell shares.

See our top pick platforms and full info:Share dealing need-to-knows

SIPP – build a low-cost DIY pension

If you're looking to take more control of the money you're saving for retirement, a self-invested personal pension (SIPP) is worth considering. SIPPs are DIY pensions which allow you to choose your own investments, so you essentially manage your own pension.

With this flexibility comes responsibility so SIPPs are really only for people who understand investing, are prepared to do research and happy to spend some time managing their retirement savings. 

See our top picks and full info:Cheapest SIPPs

Robo-Investments – funds chosen for you, based on your risk profile 

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Here you don't pick your own selection of funds, instead the provider chooses for you based on your attitude to risk (the firm will ask you a number of questions when you sign up to assess the level of risk you're willing to take). 

Though this can be somewhat restrictive and the fees high. For this reason we only feature deals from time to time, and from platforms offering cashback to give you a head start over other funds.

See more info:Robo-Investments

Ways to invest, at a glance

Stocks & Shares ISA Should ALWAYS be your first port of call. If you're new to investing, an ISA should be your preferred route for the first £20,000 (the current ISA limit) as any gains from investing are tax-free. If you've more to invest, put the first £20,000 into an ISA and then use a standalone dealing account for the rest.
Funds Generally less risky than buying individual shares. Funds often include a variety of shares or assets, chosen by a professional fund manager. It's therefore usually considered a less risky investment route compared to buying individual shares, where you shoulder the risk alone. Though you'll need to factor in fees – such as platform charges and fund management costs – as these can eat into your investment.
Share dealing If you want to choose which shares to buy/sell. If you're confident you know what you're doing, or want to be able to choose which shares to add to your portfolio, then these platforms let you buy shares from any listed company. Again you'll need to factor in fees – the main ones here are usually the charge to have an account with the platform and a fee each time you buy or sell shares.
SIPPs Build a low-cost DIY pension. If you're looking to take more control of the money you're saving for retirement, a self-invested personal pension (SIPP) is worth considering. SIPPs are DIY pensions which allow you to choose your own investments, so you essentially manage your own pension. With this flexibility comes responsibility so SIPPs are really only for people who understand investing, are prepared to do research and happy to spend some time managing their retirement savings.
Robo-Investments Funds chosen for you, based on your risk profile. Here you don't pick your own selection of funds, instead the provider chooses for you based on your attitude to risk (the firm will ask you a number of questions when you sign up to assess the level of risk you're willing to take). Though this can be somewhat restrictive and the fees high. For this reason we only feature deals from time to time, and from platforms offering cashback to give you a head start over other funds.

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Research, research, research!

If you're not sure what type of investment to pick, or concerned you might take on too much risk, there are plenty of free websites packed full of detailed fund and stock market information. We don’t cover what to invest in because we never want to have told you to put your money in something, only for you to lose money on it – though there are sites that do.

Here are our top picks to get up-to-date, in-depth and easy-to-read information on shares and funds – and they should help you keep an eye on performance too. 

  • Hargreaves Lansdown – easy-to-navigate and jam-packed with free information. You can search for shares or funds by name, company and sector. Its research team have also complied the Wealth Shortlist – a collection of funds selected for their performance potential – a great place to get started. 
  • Interactive Investor – its research team has produced tables showing its top 60 investments. If you sign up for a free account you'll also be able to access the more in-depth technical insight section.
  • Bestinvest – a range of free guides and monthly research reports, including its take on the best and worst performing funds. 
  • Charles Stanley Direct – its market data section lists FTSE companies and whole industry sectors, allowing you to check performance for any time period. 

If you're not sure how to invest and what to invest in, seek independent financial advice. Read our Financial Advice guide for more information.

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