Investing simply means putting your money to work, so that it generates more money. There's usually an element of risk attached, because the more you're prepared to take a gamble, the better the returns will usually be.
Your attitude to investing
Before taking the plunge, you need to think about two aspects of your attitude.
Firstly, are you prepared to take the risk of investing? If not, you might feel happier with the interest you get from a savings account. Don't invest any money if you couldn't live without it, or if it would change your life if you lost it.
Secondly, remember that investment is a long-term plan. If the stockmarket crashes, you might have to wait some time before you get your money back or make a profit. It's not a quick fix, and to make any extra cash you should think about not seeing your investment for a good six months minimum.
Ways to invest:
Stocks and Shares: By putting your money into shares, you're giving companies your money to help them run their business. In return, if they are successful and their share price goes up, you will benefit from the rise in value. Equally, if the company's value falls, you'll be losing money. Right now, we're in a very unstable corporate environment and many companies have lost value. Be careful investing unless you have received good advice!
Unit Trusts and Investment Trusts: You can see with shares, putting your money into one company can be quite dangerous. To combat this, trusts do three important things:
- First, they put your money into several companies at once. That way, you're spreading your risk across the fortunes of many companies: some might lose money, but some will rise in value.
- Secondly, a trust contains not just your money, but many other people's too. You're joining a whole bunch of people all committing their cash. Together you have more buying power to spread your risk across companies, and this larger pot of cash usually gets the trust a better deal.
- Finally, with all that money sloshing around, your funds will be looked after by a Fund Manager. It's a Fund Manager's job to spend time looking for the best place for your cash - day in day out - which means you need to know much less about the stockmarket than if you were investing privately. You can find out more at the Association of Investment Companies.
Tracker Funds: Trackers are a logical extension of trusts. They invest widely in top companies, and are called trackers because they (usually) track the FTSE Index; which is an indicator of how well the stockmarket is doing. So, if the FTSE goes up (you'll have seen that on TV), then the value of your investment goes up. The thing is, if it goes down, guess what? So does your money. In the past year, the FTSE has gone progressively downhill. Trackers are just an easy way to tell what's going on with your cash; and right now a trust might be a better option.
Bonds: These are a particularly safe investment, in fact, you know exactly how much you'll get back before you even buy them. Bonds are a loan from you to somebody else (usually the government), for a set length of time, usually between three months and five years. But, because there's no risk, they don't pay back particularly well.
Property: Buying and selling property can be very lucrative, especially as generally property increases in value. You will need a lot of money to start with, and it's a long term investment. Plus, if the value of your property falls, you stand to lose a serious amount of money.
Other goods: There's a market for most things people want - antiques and collectibles, land, fine wine etc. But you must understand that buying goods as an investment isn't the same as picking up a bargain and selling it on at a profit. Bargains are rare, and usually rely on the seller being stupid. The value in investing is picking goods to buy which grow in value by themselves, because demand for them grows over time.
Don't jump into investment without getting good advice from someone who knows their stuff. Your first port of call is an Independent Financial Adviser (IFA), and you can find one close to where you live at websites such as unbiased.co.uk. IFAs are qualified to give you entirely impartial advice about your finances, and recommend a course of action. Your initial consultation should be free of charge, and they will take a commission on any products you eventually buy.
Then, for stocks and shares, you need to know about the way stockbrokers charge. There are two types of deal; discretionary and execution-only. Discretionary is where a broker will take your money and invest it as they see fit. This costs more than execution-only, where a broker will simply put your cash into the companies you ask them to. There are plenty of stockbrokers online, and also plenty of sites that will give you minute-by-minute share prices so you can watch your investment rise and fall.
Finally, don't forget that you do have to pay tax on your profits from investing. The government offers some investment schemes which are tax-free, ISAs for example, and you should ask your financial adviser about these. After all, you pay tax even if you keep your money in a bank account, so tax-free schemes could save you plenty of money.
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