Beginners' guide to investment

Help understanding the basics for the novice investor, including how to start investing, the risks and rewards, and the fees you should watch out for.

Key points

When you think of becoming an investor, it's easy to think that it might not be for you.

Investing your money can sound intimidating and a bit scary compared to savings and Cash Isas, but it can be quite straightforward to get started.

Remember, however, that the value of your investments can go down as well as up, meaning that neither your returns nor your original investment are guaranteed.

What's your goal?

Consider what you want to get out of the money you invest, what you want to use it for and when you may need it.

Think about whether you want to go high or low risk, or place your funds in a diverse range of investments.

There are many different types of investment, so look into each carefully and decide whether it suits your needs, lifestyle and the amount of money you have to invest.

Whether it's a large sum or a small amount, there are ways to invest to suit most people.

Savings and Isas: Piggy bank and coinsIf the whole idea of investing seems a bit overwhelming, it may be a good idea to think about obtaining the right financial guidance and advice first.

Things to consider before investing

Before you think about investing for the first time, there are a few practical things you should think about.

It's important to make sure that your finances are healthy and secure, so you won't be left struggling if you tie your cash up in investments.


It's wise to get any debts like credit cards and loans paid off before you invest your cash. The cost of interest on a credit card or loan is likely to outweigh any returns on savings or investments.

Your mortgage may well be the biggest debt you'll ever have, so think about whether you should overpay it rather than investing your cash to reduce the amount of interest you pay.


Having a bit of money saved in an easy-access rainy day fund to put towards emergencies like a broken boiler is always a good idea.

Investment supermarkets

    Investment supermarkets are brokers for a variety of different types of investments.

    They allow you to pick and choose funds and shares and may be a convenient way to buy and manage an entire portfolio in one place, usually through an online platform.

Beyond that, you might also want to think about building up funds in higher-earning savings products such as notice accounts.

Although returns may not be as high as with some investments, they are likely to be guaranteed and you could benefit from protection under the Financial Services Compensation Scheme (FSCS).

Peer-to-peer lending options are also worth considering as a sort of halfway-house between saving and investing.

Different types of investments

Investments come in many shapes and sizes, including alternative investments like commodities, collectibles and foreign currency, as well as shares, funds and bonds.

Your investments are collectively called your 'portfolio'. It's common wisdom that investors should try to spread their money across different types of assets, to help lower the risk of your overall portfolio.

What kind of investment you go for depends on the kind of return you're looking for, and the risk and timescale you're comfortable with.

Stock and shares

The terms 'stocks' and 'shares' are used fairly interchangeably these days; essentially, buying either means owning small slices of a company.

Also known as equities, shares offer a way of owning a direct stake in a firm.

Owning shares implies a more direct relationship with a company than buying stocks (which are bought and sold more indirectly on the stock market).

As a shareholder you are part-owner of a company, giving you certain voting rights and benefits (whether or not you want to use them).

The value of stocks and shares rise and fall in line with the company's performance and the market.

There's potential for two types of return from shares, dividends and capital growth.

Dividends are the distribution of the profit made by the company, often paid out twice a year. You can choose to reinvest dividends by buying more shares.A piggy bank wearing a pair of sunglasses

You can make money from capital growth if you sell your shares for more than you bought them for.


Gilts are UK government bonds, issued by the Treasury and listed on the stock exchange.

Essentially, when you buy them you're lending money to the government for a fixed length of time at a fixed rate of interest.

Because it's thought to be unlikely that the government will default on the loan, gilts are considered a very low risk investment.

Gilts are comprised of two different types of securities - conventional gilts and index-linked gilts.

Conventional gilts make up around 75% of the gilt portfolio and guarantee to pay the holder a fixed cash payment every six months.

When the gilt matures you should receive the final coupon and the return of the principal, although there's always the risk that the issuer won't be able to repay and you'll lose your investment.

Index-linked gilts differ from conventional gilts in that the semi-annual coupon payments and the principal are adjusted in line with the UK Retail Prices Index (RPI).

This means that both the coupons and the principal amount are adjusted to take account of accrued inflation since the gilt was issued.

Stocks and Shares Isas

    A Stocks and Shares Isa acts as a tax-efficient wrapper for your investments.

    You can usually pick and choose which investments you house in your Stocks and Shares Isa, so you usually choose an Isa provider, then pick your investments to place within it - possibly through an investment supermarket platform.

Corporate bonds

Corporate bonds work in a similar way to gilts, but are loans made to companies rather than the government.

They are considered higher risk than gilts, because companies may be more likely to default on a loan than the government.

Commodities and alternative investments

Many funds and portfolios have an element of investing in commodities such as gold or oil, while alternative investments can include wine, classic cars and art.

With some such investments, as well as the usual investment risks you need to remember that the costs associated with simply maintaining your commodity can eat into any profit you may accumulate.

Investment funds and trusts

The types of investment mentioned above are often grouped together and bought and sold as part of funds and trusts.

Unit trusts and open-ended investment companies (OEICs)Savings quiz

OEICs may be suitable if you want to invest in more than one company or if you want a varied portfolio of investments.

If you aren't comfortable with choosing where to invest your money yourself - and many people aren't - then you can buy shares in an OEIC, managed by a professional investment manager.

Managers pool money from many investors - you being one of them - and buy shares, bonds, property and other investments.

Each fund invests differently - some only buy shares from UK companies, others only with foreign firms, and so on and so forth.

You own a share of the overall OEIC or unit trust. If the value of the assets in the fund rises, the value of your units or shares rise similarly.

Self-invested personal pension (SIPPs)

    A SIPP allows you to pick and choose the way your retirement fund is invested, and is also called a DIY pension.

    It acts like a tax-efficient shopping basket into which you place your choice of investments.

You can buy a high risk trust, a medium risk trust, or a low risk trust.

You can also buy themed trusts, which will determine the kind of companies the trust invests in.

For example, you can ask for an ethical trust which will avoid any companies that go against your personal beliefs.

Some funds give you the choice between 'income units' or 'income shares' that make regular payouts of any dividends or interest the fund earns, or 'accumulation units' or 'accumulation shares' which are automatically reinvested in the fund.

Similar to OEICs are real estate investment trusts (REITs) and property authorised investment funds (PAIFs), which are funds that invest specifically in property.

Tracker funds

The value of a tracker fund increases or decreases in line with a stock-market index. Tracker funds typically have lower charges than other types of funds as they're automated.

Investment trusts

Investment trusts are funds, but they're also public limited companies. This means shares in the investment trust are bought and sold on the stock market.

Investment trusts choose to invest in certain shares and other investments, and you invest in the fund itself by selling and buying shares in the trust.

Investment bonds

    An investment bond is an option if you want to invest a lump sum - the minimum is usually between £5,000 and £10,000.

    Your lump sum will then be invested in a variety of different investment funds. Many bonds are whole of life, and they can serve as a form of life insurance.

    At surrender or on death (or, if not a whole-of-life bond, at the end of the term), a lump sum will be paid out, while some bonds allow you to make regular withdrawals each year up to a specified limit.

    Investment bonds are also known as insurance bonds, with-profit bonds, unit-linked bonds and single-premium bonds.

Insurance company funds

These are investment trusts run by insurance companies.

You can choose how your money is invested, usually between the insurance company's own funds or investment funds such as unit trusts.

Venture capital trusts (VCTs)

Venture capital trusts are designed to provide equity for small businesses.

The VCT is a company run by a fund manager and listed on the London Stock Exchange which invests in other companies which are not yet listed.

Returns have the potential to be high, but VCTs are typically seen as high risk.

Investment fees

Big investments sometimes mean big fees, and these can seriously eat into any returns you get.

Find out beforehand what fees are involved in your investments. They may be based on a percentage - so the bigger your investment, the bigger the fee.

However, some fund supermarkets might charge fixed fees, which could work out cheaper if you're investing a lot or trading frequently.

You might also need to factor in paying for an independent financial adviser to help you with your investments.

What do you want from your investment?


Any profit you may make from your investment is likely to depend on a number of factors, including risk and the length of time you're able to wait.

Depending on where you invest your money, any profit can be paid to you in a number of ways, ranging from dividends from shares, to increases in fund values and fixed-interest securities.


No investment is without some element of risk, but the level of risk you take on varies between different types of investment.Cash Isas

Index-linked investments that follow the rate of inflation don't necessarily follow market interest rates, which means that if inflation falls you could see a smaller return from your investment.

Stock market investments may beat inflation but you run the risk of having to sell when prices are low, or being forced to wait until prices improve. If you're unable to wait then you could see a loss.

Spreading your investments over various products and types of investment is generally seen as a way to help mitigate risk.

Lump sum or regular investment?

Whether you should invest all your money in one go or a little bit at a time depends on your financial situation, but also what returns you want from your investments and the risk you're prepared to accept.

Gradually drip-feeding funds into investments is typically seen as a way of mitigating risk and smoothing out the fluctuations in markets.

However, you may also want to invest a lump sum for the chance of a faster return.

If you have a large sum of money that you invest in one go, you may see a large, immediate return... but it's also vulnerable to a drop in the market.

If you have a long time to ride the highs and lows of the stock market it's possible that you'll recover your losses and more, but if you need the money sooner rather than years later, it may not be the right option for you.

By Emily Bater