How to Start Investing: Guide for UK Investors

At the heart of this question lies the conflict between investing and saving. Why should you invest instead of simply saving?

Money stored securely in savings accounts risks being outpaced by inflation and losing value in real terms in the long run because interest rates are not guaranteed to keep up with rising prices.

Investing allows you to keep up with the cost of living increases and enables you to create compounding wealth by reinvesting your earnings. However, there’s a simple trade-off: the more risk you take, the more you can win or lose, and vice versa – this trade-off is the key thing to remember.

That’s why you should allocate reasonably between riskier and more stable securities. Of course, which way to swing can change with the ebb and flow of life, your risk tolerance, as well as your long- and short-term goals.

When investing, you can earn mainly through the following ways:

• Appreciation: The value of your investments rises (appreciates) and falls (depreciates) depending on their performance and overall stock market sentiment. The aim is to sell a security for a higher price than you bought it so you turn a profit.

• Dividends: Some companies issue dividend payments as they gain profit, which is a portion of their earnings distributed amongst shareholders.

• Interest Payments: These usually apply to bonds, which effectively function like a loan. When you buy a bond, you are entitled to receive regular interest payments as the lender; more on this later.

As we said, many people start investing by dipping their toes in the stock market. The stock market functions like a supermarket where people can buy and sell publicly traded company shares. But why do companies do that in the first place? First and foremost, they offer their shares for sale or go ‘public’ in order to raise money to expand and grow.

In exchange for your cash, the company offers you a tiny share, and when you buy it, you become a ‘shareholder’. As the company grows in value, so does your share. But other things affect the value of a company share, most notably what the investors think about the company, its industry, and the economy at large.

What makes stock prices rise and fall?

Say that the economy is distressed and hard times are expected; if the beginner investors don’t think that the company management is up for the challenge, they may start selling their shares before they go down in value. This means that when buying stocks and shares, you should ideally have some grasp of how the company will perform in the future.

The economy's overall performance also affects the financial markets, particularly the stock market. We see that whenever inflation runs amok, the interest rates also increase in order to curb the rising cost of living.

The interest is the cost of borrowing money. When they are low, businesses can and do borrow money and invest in their growth, this stimulates the economy, and people are encouraged to put their dime in the stock market. When they are high, the cost of borrowing becomes high and creates a ripple effect. Businesses can’t invest in growth, and beginner investors are wary of putting their money in the stock market. This leads to prices going down.

The potential for higher growth than you’ll get from saving mainly drives investors to the stock market. Even when the interest rates are high, the returns you’ll get from your savings is hardly ever in line with inflation. The caveat is that, as we addressed before, nothing is guaranteed when you invest in stocks and shares. You can make a lot of money but also lose it all.

You’ve probably seen the phrase “past performance is no guarantee of future returns” – it is for a reason. Although knowing exactly how much you’ll get in returns is every investor’s dream, there isn’t a way of knowing it for sure.

Let’s take FTSE 100, or ‘Footsie’, for example. It’s an index that tracks the performance of the largest 100 companies listed on the London Stock Exchange by stock market capitalisation. Its average annual return rate for the past 20 years is 6.89% – but it’s far from a fixed figure. For example, following the economic crisis of 2008, it returned a -31%. The following year, its price increased by 22%. This brings us to our next point:

Err on the side of caution

You can’t avoid the risk when investing, but you can mitigate it. Here are some pointers to do so;

1. Give it time – Giving sufficient time for your investment portfolio to blossom is also a time-tested form of risk management, as the returns of your investments become more predictable the longer you hold on to them.

Say that, for example, you maintain an average-risk portfolio with an average return of 10% over ten years. In one year, the value increased by 30% or dropped by 20% – the longer you hold the investment, the more you will receive a range of returns that reverts the average to 10%.

2. Don’t panic – You should also remember that the loss is not a loss unless you realise it: let’s say your initial investment of £20,000 dropped in value to £12,000 – this doesn’t mean you lost £8,000 as you haven’t sold the asset yet.

At this point, there’s a choice. You can sell the stock in a panic rush and embrace the loss, or if you don’t need to spend the money in the near future, you can hold on to it and hope it will regain its former value. You can and should review your investments regularly, but getting too hung up on value swings as such usually leads to more losses.

3. Remember to diversify – The primary way to minimise your risk exposure is to diversify your investment portfolio, which means allocating funds among various different stocks and shares. For beginners, index funds allow you to diversify without going through the effort of selecting individual stocks and shares one by one.

So, what kind of growth can you expect?

As we said before, we can’t tell you how much you will get for your investment. But we can give you an idea.

Let’s say that you are willing to invest £100 per month. Some months are going to be up, and some months down. If we aim for a realistic return rate of 7%, your yearly returns can look like this:

• 1st year: £1,200 (your investment over a year) + £84 (7% growth) = £1,284.

• In 10 years, you can earn £5,000 in profit and will have £17,000 in total,

• In 20 years, you can earn £17,000 in profit and will have £52,000 in total,

• In 30 years, you can earn £86,000 in profit and will have £122,000 in total,

• And in 40 years, you can earn £214,000 in profit and will have £262,000 in total.

Again, this is just for illustration purposes and assumes that your return rate will remain fixed at 7%, and you can dedicate £100 from your disposable income to invest every month for 40 years.

There’s nothing stopping you from buying stocks and shares individually from the get-go. As we will discuss below, thanks to the plethora of investment platforms available in the UK, it’s straightforward to do so. Researching, managing, and staying on top of it? Not so much. Not for beginners, at least.

You can start with blue-chip stocks that are often more reliable as they exhibit a long track record of success. Or alternatively, you can opt for index funds that would already include the top-performing blue-chip stocks by default.

Index funds are a type of investment fund that holds all of the securities (assets) in a specific index. They aim to match the performance of that benchmark as closely as possible. The S&P 500 is perhaps the most well-known index. It tracks the performance of the 500 largest companies listed on US stock exchanges.

By buying into an index fund, you effectively become invested in hundreds, at times thousands, of individual stocks and shares that you can't possibly buy on your own as a starter. But don't just take our word for it; listen to Warren Buffet, an investment fund manager who scored a staggering 19.1% annualised return over the past 53 years.

Us mortals can't match Buffett's performance, of course, but benefit from his ongoing investment advice: index funds are among the smartest investments anyone can make. In his letter to his shareholders in 1993, Buffet remarked:

"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb."

His arguments prove to be true year after year:

• Index funds consistently outperform actively managed funds, which are managed by a professional investment fund manager who handpicks stocks based on potential growth.

• Actively managed funds tend to have higher costs due to the overhead charges, whereas index funds are passive funds, meaning they don't incur as much cost. However, those lower costs can significantly affect your returns in the long haul.

Gone are the days when you had to pick up the phone and instruct a broker to buy and sell stocks for you and glue your eyes to the TV to monitor its performance. Nowadays, stock trading is far more mundane. You download a trading app on your phone, browse through your options, put some money in, and voila! You’re now a stock owner.

First off, you need to choose the right online trading platformfor yourself. They come in all shapes and sizes these days – you can choose from discount brokerages for a DIY approach or opt for a full-service brokerage if you need some professional advice.

Best investment platform for beginners

	Name	Score	Visit	Disclaimer
	eToro	8.7	Visitetoro.com					Don’t invest unless you’re prepared to lose all the money you invest.

Common costs of investing

In either case, you will pay extra to your platform to facilitate the trades for you. Unfortunately, while the ways they charge you range from quite subtle to blatant, you can’t really avoid these charges.

• Commission is the primary way brokers make money. It can be a percentage or flat fee charged per trade. Percentage fees usually float around 0.5%, while flat fees can range from £1 to £11. Many discount brokerages waive commissions now, but they still charge in other ways.

• Deposit/withdrawal costs are among said discount brokerages’ favourite ways of making money. Ensure you understand how these work – usually, they are different for different payment methods. For example, card payments typically incur the highest processing fees.

• Maintenance fees encompass charges like annual platform fees, custody fees for holding your funds, or inactivity fees for when your investment account lies dormant for a while. So, for example, if you prefer to invest a lump sum into index funds, say once a year, you should be on the lookout for the inactivity charges. They can start after three months and be charged monthly.

There are different types of investment accounts: meet your tax-wrappers

A wrapper functions like a box in which you hold your assets. You may have heard the phrase tax wrapper more than a wrapper due to the two most beloved forms of wrappers: stocks and shares ISA (individual savings account) and SIPP (self-invested personal pension). They shelter your investments from capital gains tax and dividend tax.

The annual contribution limit to ISAs and SIPPs is £20,000 as of this writing – which the government sets at the beginning of each tax year. As long as you don’t exceed this threshold, much like most folks, you don’t pay any tax on capital gains that your investments yield.

Any UK citizen over the age of 18 can open up an ISA or SIPP account, and frankly should. It’s a great way to start investing without worrying too much about the taxes eating up your profits, and you can always create a different pot should you ever edge the yearly allowance.

Best ISA and SIPP accounts for beginners

	Name	Score	Visit	Disclaimer
	Freetrade	7.6	Visitfreetrade.io					The value of your investments can go down as well as up and you may get back less than you invest.

Freetrade disclaimer: The value of your investments can go down as well as up and you may get back less than you invest.

ISA eligibility and tax rules apply. SIPP eligibility and tax rules apply.

A SIPP is a pension designed for you to save until your retirement and is for people who want to make their own investment decisions. You can normally only draw your pension from age 55 (57 from 2028), except in special circumstances. To do so, you will have to transfer your SIPP to another provider.

Bonds and gilts

Bonds represent the debts of the government, a company, or any other organisation. They are also called IOUs, which represent the written acknowledgement of debt that one party owes another. At their core, bonds are loans issued by these organisations that banks can buy, insurance companies, funds, or private investors like yourself. Gilts refer to UK government-issued bonds.

So, this is how bonds work: the issuer borrows money by releasing a bond for investors to purchase, and when you do so, you effectively lend them the money they need. In return for your money, you receive an IOU, which states the amount you lent and the interest rate called the coupon, which the organisation will pay you while they have your money and the date they will pay it back.

So your IOU may say something like this;

“XYZ Corp owes you £1,000, which they will pay back on the 1st of January 2030, and they will pay you a 3% coupon per year.”

Bonds have the benefit of a sustained income stream and are considered relatively trustworthy as it remains safe as long as the company or the government goes bust – the latter happens even more rarely than the former. One thing to remember is that the interest rates tend to go lower as the bond quality goes higher, meaning that if a company or organisation has a lower risk of going bankrupt, their yield will be low as well, and vice versa.

ETFs

The best exchange-traded funds function more or less like mutual funds, but they are traded on exchanges like stocks, at any time of the day and as many times as you like. Unlike mutual funds, ETFs are also the cheapest to invest in and have little to no minimum investment requirements. Much like mutual funds, ETFs offer an easy way to diversify your portfolio instantly. By buying a share of an ETF, you essentially gain exposure to a variety of shares that you may not be able to purchase individually on your own.

An exchange-traded fund usually tracks a particular share market and aims to match (or beat) the tracked asset value. These could be indices like S&P 500, commodities like gold or oil, or sectors like the energy industry.

Minimum investment requirements - although rarely - exist depending on your choice of investing platform or asset class. Yet, with so many opportunities, you can start with £1, £100, or £1,000 – investing is incremental, so no amount is too little.

But deciding how much you need to start investing is not the first step; it is determining how much you can. The rule of thumb is never to invest more than you can afford to lose, but this doesn’t only cover basic necessities like rent, utilities, or food. To understand what remains outside these compounds, you must look honestly at your financial situation beyond regular payments.

Before investing make sure to:

Pay off any outstanding debt: By paying off debt, you will eliminate the drain on your finances that will end up eating away your returns on investment anyway. While it may be tempting to keep low or 0% interest debts and jump into investing instead, which admittedly may yield returns higher than your debts, the catch is it is not, and will never be, guaranteed. So it’s wiser to nip it in the bud and clear off your commitments as such before you start investing.

Build an emergency fund: Almost half (47%) of Brits don’t set aside money for emergency situations. Don’t fall into that trap; save up at least 3-5 months of living costs in a savings account, and make sure it stays there. Having easily accessible cash as such will cover unexpected unemployment, illnesses, or any sort of hardship that may drain you financially.

Risk tolerance refers to your ability to cope emotionally with the volatility of investments. Defining your risk tolerance is the most critical factor in determining your investment strategy, as it ultimately shapes your portfolio. Many investment platforms offer tests to get your attitude towards risk assessed.

To reiterate, every investment involves a degree of risk – it's a spectrum, not a dichotomy. Some products, like stocks, are riskier than others, like bonds or gilts.

There’s also a direct correlation between the potential returns and the amount of risk an asset carries: the average return from stock investments is 10%, whereas a 15-year return from gilts hovers around 2% and 3%. The key is to balance risk and return to maximise your profits.

Age-based risk profiling is tossed around quite often – younger investors, or investors looking at longer time horizons, tend to have riskier portfolios as the period they are willing to stay money invested allows them to power through the ups and downs of the stock market.

Conversely, someone near retirement, or any investor who wishes to withdraw before it’s too late, tends to opt for a more conservative mix of assets or slowly switch to one to minimise the potential losses that may accrue if withdrawn from the stock market during a downturn.