Beginner’s guide to investing

Remember, with investing there are no guarantees. Investments change in value, and you could lose money as well as make it. So before you pick an investment, it's important to research it thoroughly. We have a wealth of information on our website to help. And don't forget, it’s easy to get in touch with us – we want to make your investing journey go as smoothly as possible.

Bewildering though it can seem at first, investing gets a lot easier when you understand the basics.

On this page, we'll explain them. You'll read about the pros and cons of investing versus saving, discover the difference between the main investment types, learn whether you're ready to invest, and find out how to get up and running.

And if you’re hungry to learn more, we’ve a bite-size jargon buster for you – or you can sink your teeth into our first-time investor’s guide.

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Our first-time investor guide

Why invest?

Let's suppose you have £10,000 and want to make it grow. Do you leave it in the bank, or invest it in the stock market? The answer: it depends.

You probably already know the main, headline benefit of investing. It offers the possibility of larger returns than you'd get with a savings account.

And this, broadly speaking, is backed up by history. Below you can see how UK shares have fared against cash over every ten-year span going back to 1908. The figures are 'real returns', meaning they've been adjusted for inflation.

Real investment returns (% per year)

For eight decades out of the 11 shown, you’ll see that UK shares have outperformed cash. However – and this is a big however – these figures are an average. It's crucial to remember that when investing, there are no guarantees.

Yes, you can make money from the stock market. But you can also lose it – all of it, potentially, if the company you're investing in goes under. It’s precisely because investing can be unpredictable that some people seek the certainty of cash.

Years Equities Gilts Cash
2008-2018 5.8 2.7 -2.5
1998-2008 -1.5 2.4 2.4
1988-1998 11.1 8.7 4.7
1978-1988 12.4 5.8 3.8
1968-1978 -3.5 -3.3 -2.7
1958-1968 11.0 -1.4 1.9
See more
1948-1958 7.1 -4.5 -1.8
1938-1948 3.9 0.8 -2.6
1928-1938 3.6 6.7 2.4
1918-1928 10.3 7.0 6.9
1908-1918 -3.5 -7.4 -4.8
Years Equities Gilts Cash
2008-2018 5.8 2.7 -2.5
1998-2008 -1.5 2.4 2.4
1988-1998 11.1 8.7 4.7
1978-1988 12.4 5.8 3.8
1968-1978 -3.5 -3.3 -2.7
1958-1968 11.0 -1.4 1.9
1948-1958 7.1 -4.5 -1.8
1938-1948 3.9 0.8 -2.6
1928-1938 3.6 6.7 2.4
1918-1928 10.3 7.0 6.9
1908-1918 -3.5 -7.4 -4.8

Source: Barclays research. Returns adjusted for inflation.

Saving vs investing

  • Cash is less risky, but can lose value over time

    Under the Financial Services Compensation Scheme (FSCS), cash you have in the bank is protected by up to £85,000 per UK-regulated financial institution – you can check if your bank is covered on the FSCS website.

    But just because your cash is protected by this scheme doesn't mean it's entirely safe from loss. The culprit? Inflation.

    If inflation stands at 2% (the Bank of England’s target) and you stick £10,000 in a bank account paying 0% interest, in a year’s time it will be worth £9,800 in real terms. After five years it would have dropped to £9,039 and after 10 years, to only £8,171.*

    By leaving your money in the bank, you can fall foul of something called 'reckless conservatism'. Your savings might seem safe, but they'll lose value over time if interest rates don't keep up with inflation. And over the last ten years, interest rates have been historically low.

    *Source: Shares magazine, 2019

  • Investing is higher risk, but has potentially higher rewards

    Which is why some people plump for investing over saving. It has a greater potential upside, meaning your wealth can outgrow the effects of inflation.

    But of course, investing also has a greater potential downside. It’s a trade-off. You might make more money than saving – but you also have to accept the possibility you might lose more money, too.

  • You can manage the investment risk you take

    At the possibility of making a loss of any size, many would-be investors head to the hills. But it’s a mistake to view investing as nothing but a high-stakes gamble.

    You can curb the risk you take on in several ways. One is by investing over the long term: five years or more. A longer timeframe gives your money more time to bounce back in case there’s a market downturn. Another way is by diversifying – that is, not putting your eggs in one basket. If you invest in only one sector or company and it goes south, your entire portfolio will be dragged with it.

    And different investments carry different levels of risk. If you wanted to take it cautiously, for example, you could choose bonds instead of shares, or leave it to an expert by buying a fund. We’ll explain how the different investment types work next.

What can I invest in?

The answer is: almost anything. But in the financial markets, there are three main investment types: shares, bonds and funds. Here’s how each works – and the level of risk each typically carries:

Investment type How does it work? Low or high risk?
Funds A fund is a collection of investments, chosen and managed by an expert – usually for a fee. There are many different types of fund, including OEICs, ETFs and investment trusts. As a typical fund contains 30-60 different investments** , it's a handy way to diversify where your money is – with just one investment. And as the selection is chosen and managed by a fund manager, you can leave the hard work of picking individual investments to an expert.
Shares When you buy a share (also known as a stock or equity), you buy a tiny part of a company. If the company does well, so will your investment. And you may receive a proportion of the profits (called a dividend). Historically, shares have outperformed safer investments like cash and bonds. But they're also riskier. It takes research to find companies worth investing in, and you'll need to consider buying a diverse range of shares so your eggs aren’t in one basket.
Bonds Bonds are a bit like IOUs. When you a buy a bond, you're effectively lending a company or government money. You also receive interest – the higher the risk of the bond, the more interest you'll get. Bonds issued by the UK government are called gilts. Bonds are seen as less risky than shares, and compared to stock markets, bond markets tend to be less volatile. But historically, bonds have offered lower returns over the long term.

**Source: Boring Money, 2019

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Not sure what to choose?

We know that choosing your investments isn’t easy. That’s why we offer time-saving investment ideas that let you leave a little, or a lot, of the work to our specialists.

jargon buster
Learn the lingo

One thing that makes investing so head-spinningly hard is all the jargon. Don't know your index tracker from your investment trust? Brush up with our handy guide.

Are you ready to invest?

Before you crack your knuckles and begin buying investments, you need to make sure you’re ready. Here’s what it’s important to check.

Have you paid off any high-interest debt?

Investing your money, rather than using it to pay down any high-interest loans (e.g. credit cards) you have can be a costly mistake. If the APR on your loan exceeds the average annual return on shares for UK investors of 5.2%***, it’s sensible to pay the loan off first.

Can you afford your bills and committed spending?

It may sound obvious, but money you invest in the markets won't be available to meet any bills, everyday expenses or spending commitments such as upcoming holidays. So before you begin investing, make sure you’ve planned out your finances and set aside enough cash to afford your outgoings.

Do you have a cash cushion?

Broken boilers, leaky roofs, losing your job – life’s full of unexpected expenses. So as well as setting aside money to tackle everyday outgoings, it can be a good idea to keep a cash cushion to the tune of a few months' salary to tide you over for when the gods don’t smile on you.

Do you intend to invest for five years or more?

If what you’re saving for falls within the next five years, investing probably isn't the way to go. That's because your investments may not have enough time to recover should the markets go south. For narrower timeframes (where inflation is also less of a threat), you're likely better keeping your money in a savings account.

Finally, are you comfortable taking a risk with your money?

The longer you invest for, the more likely it is your patience will be rewarded with profit. But when investing, there are no guarantees. So a good guiding principle is: only invest money you can afford to lose. If the mere thought of taking a risk with your wealth puts you in a sweat, it’s probably better to give investing a swerve.

How much should I invest?

So you've checked you're investing-ready. The next question is how much money to put in.

There's no one-size-fits-all answer to this question. Firstly it depends on how much you can afford. And secondly it depends on your goals. What are you saving for, and when? This will give you a rough idea of how much you need to put in every month, or every year, to hit your target.

Of course, there's another important variable here, and that's your rate of return. As we’ve discussed, knowing exactly how your investments will fare in the future is impossible. But to get an idea, you can let history be your guide.

The average annual return on UK investments between 1989 and 2014, adjusted for inflation, was 5.2% for shares, 4.6% for bonds and -0.8% for cash*** . Just remember, however, that this is just an average, and how the market has performed in the past isn’t a perfect gauge for how it'll do in the future.

***Source: Prudential

How do I fund my account?

Don't imagine that to start investing, you need to have a lot of money to hand. While you can begin by funding your account with a cash lump sum, there are other ways to take your first steps:

  • Lump sum – you can start investing with AJ Bell Youinvest by funding your account with £500 or more.
  • Transferring an account – if you have a cash account elsewhere (an ISA, for example), it’s easy to transfer it to us.
  • Regular investing – a popular way to get started is with our regular investing service, which lets you put as little as £25 a month into an investment of your choice. Taking it slow and steady isn’t just more forgiving on your finances. It can also cushion you from investing’s ups and downs, and saves you from having to worry about ‘timing’ the market to find the right moment to invest.

Ready to start your investing journey?

Start investing

Or, if you have a question, you can send us a message.