Investing for Beginners: A Plain-English UK Guide

Should you invest at all?

Before investing, check your basics are covered:

1. Clear expensive debt. Interest on credit cardsHow Credit Cards Work in the UKHow UK credit cards work: interest, APR, minimum payments, interest-free periods, fees, Section 75 protection and how to use a card without getting into debt.Read more → and loans usually costs more than you are likely to earn from investments. See how to pay off debt faster.
2. Build an emergency fund. Keep several months of essential spending in cash. See how to build an emergency fund.
3. Check your pension. Workplace pensionsWorkplace Pensions Explained: Auto-Enrolment and MoreHow workplace pensions work in the UK: auto-enrolment, contributions, tax relief, defined contribution and defined benefit schemes and opting out.Read more →, with employer contributions and tax relief, are often the best place to start. See workplace pensions explained.
4. Have a time horizon of at least five years. Investments can fall sharply in the short term. Money you need soon is better in a savings account.

Risk and return

In general, assets with the potential for higher returns carry higher risk. Cash is the lowest risk for your capital, but its value can be eroded by inflation. Shares have historically produced higher returns than cash over long periods, but with much bigger swings, and past performance is not a guide to the future.

Risk is not only about market falls. Other risks include:

• Inflation risk: your returns do not keep up with rising prices
• Concentration risk: too much money in a single company or sector
• Currency risk: for overseas investments
• Charges: costs eat into returns
• Behavioural risk: selling in a panic at the worst time

Main types of investment

• Shares (equities): part ownership of a company. The value can rise and fall, and companies may pay dividends.
• Bonds: loans to governments or companies that pay interest. Generally lower risk than shares, but not risk free.
• Funds: pooled investments managed for many investors. They can hold hundreds or thousands of shares or bonds, spreading risk. - Index (tracker) funds follow a market index and tend to have low charges. - Actively managed funds try to beat the market and usually charge more. - Exchange-traded funds (ETFs) are funds traded on a stock exchange. - Investment trusts are listed companies that invest in other assets.
• Property: directly, or through funds, which can have restrictions on withdrawals.
• Cash: savings accounts, mainly for emergencies and short-term goals.

Diversification

Spreading your money across different assets, industries and countries reduces the effect of any one investment doing badly. A global index fund is one simple way to get exposure to many companies. Diversification does not remove risk, and it does not guarantee a profit.

Time in the market

Over long periods, markets have tended to recover from falls, but this is not guaranteed. Regular investing, for example monthly, spreads your purchases over time, which can reduce the impact of buying at a market peak. Trying to guess the best time to buy or sell is notoriously difficult, even for professionals.

Our savings growth calculator illustrates how regular contributions and compoundingCompound interestCompound interest is interest earned on both your original money and the interest it has already earned.Read more → can build over time. It uses a fixed assumed rate, so real returns will vary.

Charges matter

You may pay:

• Platform fees, a percentage or fixed fee for holding your investments
• Fund charges, shown as the ongoing charge figure (OCF)
• Dealing fees when buying and selling
• Advice fees, if you use an adviser
• Other costs, such as foreign exchange

Tax wrappers

Using the right account can reduce the tax you pay.

• Stocks and shares ISA: returns are free of UK income tax and capital gains tax. See ISAs explained.
• Pensions: tax relief on contributions and tax-free growth, but access restrictions. See personal pensions and SIPPs.
• General investment account: no tax advantages, so you may owe tax on dividends and gains above your allowances.

How to get started

1. Set a goal and timeframe. Retirement in 30 years is different from a house depositHow Much Deposit Do You Need to Buy a Home?How much deposit you need to buy a home in the UK, how deposit size affects mortgage rates, ways to save, and schemes that may help first-time buyers.Read more → in five.
2. Decide how much risk you can take. Think about how you would feel if your investments fell by 20 or 30%.
3. Choose an account type. A pension or ISA is a common starting point.
4. Choose a platform. Check that it is authorised by the Financial Conduct Authority, compare fees and look at its protection. The FSCS may cover you if an authorised firm fails and cannot return your assets, up to a limit, but it does not cover falls in investment value.
5. Pick your investments. A diversified, low-cost fund is a typical starting point.
6. Invest regularly, and automate it.
7. Review occasionally, but avoid reacting to every headline.

Mistakes to avoid

• Investing money you need soon
• Putting everything in one share or sector
• Chasing last year's best performer
• Ignoring charges
• Panic selling after a fall
• Borrowing to invest
• Following tips on social media, especially promises of guaranteed or very high returns

Beware scams

Investment scams are common. Warning signs include cold calls, pressure to act quickly, guaranteed high returns, and unregulated firms. Check any firm or individual on the FCA Register and the FCA's Warning List before handing over money. The FCA's ScamSmartHow to Spot a Pension Scam and Protect Your SavingsWarning signs of pension scams in the UK, how fraudsters operate, the checks to make with the FCA, what to do if you have been targeted and where to report it.Read more → campaign gives advice. For pensions specifically, see how to spot a pension scam.