Investment basics

Investment basics

What does investing mean?

We mean, putting your money somewhere in order to increase its value. It can be risky, but we will also cover what we mean by risk. It's important to remember that the value of your investments can go down as well as up and you might get back less than you put in. Just because something did well in the past, doesn't mean it will in the future. You should always consider factors which may impact that investment like the overall economy or other relevant aspects.

It's also important to remember the benefits of diversification, or not putting all your eggs in one basket! If you put all your savings into one specific investment, and this turned out to be a bad investment, then you will feel the full effect. But if you only put 20% each into 5 different investments, and only one performed badly, then the other 4 will have a positive effect and reduce the overall loss to you.

The main options for investing are:

Cash

Cash in the bank, in a current or basic savings account. Generally the interest rate is low in comparison to other options, with some banks giving no interest at all.

This does not carry many risks - the two risks being the value being lowered due to the impact of inflation, and the risk the bank will fail.

Cash in the bank is usually protected up to a limit of £85,000 per bank, meaning if the bank were to fail, your money is not at risk, up to that limit.

You could also have a ‘cash ISA’ - This is essentially a regular savings account, but there is a limit to how much you can pay in, £20,000 per year, and in return the interest is tax free. There might also be a restriction on how often you can withdraw money. These are great if you can put in the max each year and are happy with a low return in exchange for very low risk.

Property

We love to buy property. Around 65% of us own our own homes.

Here, we are talking about rental properties and the ups and downs of being a landlord.

Historically, people have felt confident investing in property as house prices, for example, have risen 700% in the past 30 years.

Butttt....You need to have quite a lot of cash in order to buy a house, not just the deposit but the fees to complete the purchase can be too high for some. The value can go up or down, you might need a mortgage and the interest rates will reduce your return, there are taxes to pay on purchase, sale and the rent received. You might need to pay for property maintenance, a managing agent to deal with the tenant, or have empty periods with no tenant. If you need access to the money, it can take several months, or a lot longer, to sell the property. For many people, buying an investment property takes all their spare cash leaving none left over to spread their investments.

The alternative to this, in order to avoid some of the negative factors above, is a REIT and we explain more about this here.

Shares (sometimes calls stocks or equity)

Its official name is equity, but commonly called shares. Shares are quite literally a share in the ownership of a company. If you buy a share in a company, you own a proportion of that company, and you can get a share in the profit it makes. This is called a dividend. Not all companies have requirements to give out dividends, as some keep the profit to spend in the business. REITs, example, have to give out at least 90% of profit each year as a dividend.

Shares can be attractive to some people because alongside the dividend, the price of a share can rise over time as well. Of course, share value rise and fall all the time.

Many factors can influence the value such as specific items like suppliers or market sectors, or larger influences like the economy. For example, if you buy shares in Tesco, you could consider prices of their suppliers and contracts in europe after brexit, and you could consider things like customers preferences to cook at home instead of eating out. Generally there are a lot of complex factors that can effect most shares, its sensible to invest in stocks where you understand and can access the information that is important. In the case of REITs this could be the local area, the preference towards online shopping and logistics, housing for aging populations etc.

A portfolio with a number of different shares spreads your risk (remember not putting all your eggs in one basket!). It is possible to buy a ready-made portfolio that represents the whole stock market, or a section of it. These are called trackers. We recommend that you properly consider what these trackers invest in and any hidden management fees, to see if it's right for you.

Some ISA's invest in shares and you might have heard of a 'stocks and shares ISA'. These can offer the potential to have higher returns than cash ISA's, but they could also provide lower or even negative returns - this means you end up with less money than you put in. Often there will be management fees on top of this, which will also lower your return.

Bonds

Bonds are essentially a loan. Its debt that the company or government sells, at a certain interest rate. Like offering anyone a loan, the main thing to consider is the chance that you wont get repaid. This might happen if the company or country goes bankrupt. Generally the interest rate will reflect the common opinion of the chance of being repaid, the higher the chance people believe you be repaid, the lower the interest offered. The price of the bond can change over time, again based on general opinion. Some people find them attractive as there is a repayment date, and regular interest payments which can be quarterly, semi annually or annually