The decision to start investing shouldn't be taken lightly, but if done well you could get much better returns than even the best savings accounts. We go through everything you need to consider when investing in shares.
There are a dizzying number of investment options out there, and few of us can spare the time to study markets in detail and learn to invest money like a city trader, but that doesn't mean you should give up on the idea!
If you spend just a little time asking yourself a few questions, you'll be able to work out how to invest money in a way that suits your finances.
It's important to work out if you have enough spare money to invest. When you add up your investment kitty, make sure you're still left with enough money to meet your outgoings as well as a little extra for a rainy day too - preferably held in an account you can access easily.
Aside from the risk that you might lose the money you invest, you'll also have to be prepared to be without the funds for a while. Investing is a mid to long term outlay - with some, there will be restrictions on when you can withdraw your money. Even if there are no restrictions, most investment products perform better over a longer term.
Investing one large lump sum isn't your only option; many investment options will let you pay in each month, so it's worth working out how much you could regularly afford to contribute.
Interest rates on savings accounts have remained low for years, with plenty accounts not even keeping up with inflation.
Looking for higher returns, many people have tried alternative products like Investment ISAs or share dealing in the hope that they can earn a better income from the dividends paid or the amount the investment's value increases over time.
So if you're not satisfied with the savings rates out there, you'll need to look into the alternatives.
The possibility of earning a decent return on your money comes at a cost - the most lucrative investments are also often the riskiest.
While a savings account with a bank or building society will give you back the money you put in as well as interest earned at a steady, agreed rate, investment products rarely guarantee you'll get your capital back, but offer different levels of risk.
Deciding how much risk to take will depend on what sort of returns you expect and whether you can afford to lose the money you're investing if it falls flat - if you can't, make sure you go for a safer bet.
We're all different - some people prefer to manage their finances independently, wanting to understand every aspect of it and make their own decisions; others would rather pass the responsibility onto an expert in the hope that they'll do a better job and cut out some hard work.
How much help you need will depend on how confident you are handling things yourself, how much time you have spare, how much control you want to keep yourself, and whether you think an expert can make a difference to how well your investments succeed.
Execution only accounts will provide you with a platform to invest and little else. This is useful if you want to save money on fees, but only if you're comfortable being in charge of your investments on your own.
If you do decide to get some advice from an Independent Financial Advisor, try our 5-Step Plan to Finding an IFA You Can Trust with Your Money.
Most investments aren't free of fees; their more complicated nature usually means that you'll need to go through an investment company, whose services will cost you money.
Fees are now usually charged upfront, rather than on a commission basis, so you should be able to compare how much each option will cost you more easily. Just don't forget to look into the fees when you consider what product is best for you.
These charges can include management fees for annual administration, a fee for each individual deal or transfer, and an initial deposit fee.
Using an online trading platform can help avoid some of these charges, but doing it this way will mean you're not given advice by brokers.
You don't need to be an expert on every form of investment under the sun - you'll only really need to take a quick look at the investment basics for each option, then research the one you pick in greater detail.
There are two main things an investment can do: generate a regular income, or build your capital over time.
For example, if you're retired and need to boost the amount of spending money you have day-to-day, then you should be investing for income.
If you have a specific aim in mind, saving for retirement or to make a large purchase in the future then investing for capital growth is the way to go.
Shares are 'bits' of a company that a board sells in order to raise capital. They'll invest the revenue this generates back into the company. Shares are sold via the stock exchanges, and are traded at prices determined by how popular a company is at a particular time.
If you're considering putting your money into shares, whether that is through direct investment in the stock market or through pooled funds such as unit or investment trusts, you need to be looking at a five-year time span at the very least.
If you have less time than this, or do not want to tie up your money for that long, then you would need to consider other options, such as savings accounts or shorter-term investments.
This is a big part of investing and will influence the investment decisions you make. If you invest in shares your capital will rise and fall according to how the markets are performing.
So if you can't cope with watching your hard-earned cash falling in value, then investing in stocks and shares is not the right option for you.
However, even if you consider yourself very risk adverse, there are investments out there for you. But the more risk you're willing to take, the greater the potential rewards!
There are ways to manage the risk when investing in shares, including;
Stop orders: This is where you set the bid value and your broker will automatically offload your shares if they drop to that level. This gets you out of the trade before prices fall even further, where you'd make an even bigger loss.
Trailing stop orders: These update daily to follow movement in share price and limit your potential losses to a level you're comfortable with.
Put options: These reduce the risk of buying too high - or selling too low - by guaranteeing the price at which you can buy or sell shares.
Call options: guarantee the price at which you can buy a particular asset, for a fixed period of time.
Our guide; I have a significant amount of cash: What's the best place for my money? Outlines a number of options, including those for the risk adverse!
You need to work out how much you have available to invest, and whether or not you can afford to lose it!
Before you consider putting money into investments, you need to take a look at what else you have to pay for, and make sure that all of your other commitments are covered.
Think about how you want to invest your money; will you plough a lump sum in straight away, or drip-feed it into the markets over time?
When you've decided that investing is the right route for you to take with your money, and you've established your investment aims, it's time to look at your options.
The aim is to buy shares when they are at a low price, and sell them when their value has increased so you get a higher price - this is how you make money from them.
When investing in shares, the major fee that you'll face is the dealing fee. This is what your stockbroker will charge you to do a deal for you.
The dealing fee is generally much lower if you use an online trading platform, but you may not get the advice on the decisions you're making that come with a stockbroker.
If you invest in funds rather than shares, then you'll usually be charged an initial fee and an annual management charge by the fund manager. These fees can vary, but will be based on a percentage of the amount you're investing.
There are a variety of taxes associated with investing that generally relate to the purchase and sale of shares, including:
Capital Gains Tax: Tax on the profit you make from an increase in the value of the 'capital' you invested in the shares or funds; in other words the growth in your initial investment. It is applied when you sell your shares. To find out more information regarding CGT, visit the Gov.uk website.
Stamp Duty: Tax applied to the sale of shares worth more than £1,000. Stamp Duty is charged at 0.5% on each document that needs to be stamped, and is rounded up to the nearest £5.
Tax on dividends If you receive dividends from your shares it's possible that you will need to pay tax on the income you receive. However, this will only be the case if you have already used up your annual income tax allowance.
You can pay less tax on your investments by using a stocks and shares ISA. This tax-efficient wrapper will allow your investments to grow free of Capital Gains Tax, and stamp duty. You will be able to take any income you receive from an ISA tax-free too.
You can save up to £20,000 this tax year (2021/22) in an ISA, all of which will be sheltered from the taxman. For more on investing with an ISA, read our guide on stocks and shares ISAs.
You have a £2,000 tax-free dividend allowance, which means you can earn up to this amount from investment dividends without paying tax on it.
Investing in shares is not the only option you have, and before you commit any money and start buying shares, its worth considering what other investment opportunities are out there.
Here are a few of the main alternatives you should consider:
Invest in property
Stick with savings - If you've decided to leave your money in savings, read our guide 6 Top Tips to Guarantee You Get the Best Rate on Your Savings, for help to get the deal you can
Invest in a pension - Read Should I Get a Pension, for advice
Once you're sure that share dealing is the right option for you, and you've thought about the sort of investments you might make, you need to start thinking about starting your investment portfolio.
You'll need to use a stockbroker to invest in shares, but there are a variety of ways you can go about choosing a broker to work with. You can get someone to advise you, someone to make your decisions for you, or someone who will simply make the trades for you with no advice.
Which option you would need depends on how experienced you are, and whether you are after advice or not. These are the three main types of stockbroker you can use to buy shares:
Discretionary stockbrokers will make invest on your behalf and make your portfolio decision for you. The fee they charge is likely to be slightly higher than advisory stockbrokers.
Advisory stockbrokers will offer you advice on the share deals you want to make. They can help you run your portfolio and you should stay in regular contact to ensure your portfolio is on track. You need to pay a 1-2% fee for their service.
Execution only stockbrokers will action your trades but without giving any advice at all. These are best if you know what you're doing and don't want to pay for unnecessary advice. Execution only stockbrokers are also available online.
Online share dealing accounts are the cheapest way to deal shares, the brokers are usually execution only, but will often have lots of information on their sites about how shares are performing, recent trends, areas to invest in and so on.
You would have to know what you are doing, and generally you'll be running your own portfolio online, so you would need to access it for updates regularly.
The major advantage of an online share dealing account is that you can keep tabs on your portfolio wherever and whenever you want to.
However, most online trading accounts don't give any advice on whether it is a good idea to buy or sell a certain share. This is called 'execution only share dealing' - the company simply executes your trade for you.
When you compare cheap share dealing accounts, you should consider the following:
The amount you will be charged for each trade
Whether there are discounts for regular traders • Whether the company has an online share dealing facility
Whether the company charges an annual fee
What assets and investments the service lets you trade in
Whether 'mobile trading' is offered on your smartphone
Whether the company has any introductory offers
While finding the cheapest share dealing accounts is important, it's also vital to consider the other benefits that a service may offer - such as ease of use or access to a 'virtual portfolio' of your investment holdings.
When making a plan you need to start seriously thinking about exactly what shares you want to invest in.
You'll need to consider:
What sectors should you invest in? If possible, consider investing in sectors you have a knowledge of
What markets should you invest in? It's a good idea to spread your risk, and make sure you don't invest too heavily in high risk areas like emerging markets
What's your strategy? This will depend on your aims (growth or income), and the level of risk you're willing to take
Before you start trading it's a good idea to use a test account so you can try your hand at investing and get to grips with the platforms before committing any money.
Most online brokers offer this facility without a charge, and it'll give you a chance to test your investing instincts before risking your cash.
Compare investment accounts to determine which platform is suitable for your needs.