How to start investing as a beginner in the UK

In this beginner's guide to investing, we explain how to get started with investing, breaking down the process into simple steps.

What is investing?

Investing is where you buy an asset or a range of assets in the hope that your chosen assets will grow in value and produce a return higher than you would get by placing your money in a savings account with a bank or building society.

History has shown that leaving your savings in cash for the long term means that the spending power is eroded over time by the impact of inflation. The interest you earn through a savings account will rarely beat inflation so investing your money in assets that have the potential to beat inflation is a wise move.

To get a greater return on your money, you will need to accept the higher risk that exists by investing in assets as opposed to leaving your money in the bank. Higher risk means that there is a higher risk that you could lose some or all of your money depending on the type of asset you choose to invest in.

What should a beginner invest in?

When we talk about investing this typically means investing in one or more of the following assets.

• Shares
• Bonds & Gilts
• Commodities
• Funds

If you are currently a member of a pension scheme or have a personal plan, such as a SIPP, then you will almost certainly already be investing in shares and bonds via something called a fund. Before we go any further, we'll define what the different investment assets mean.

What are the different types of investment options for a beginner?

Below, we take a look at some of the most popular investment assets.

What is a share?

A share is a small part of a company that is listed on the stock exchange. By buying a share you are effectively buying part of a limited company.

Companies place shares on the stock market to encourage investment and then use the cash generated to help develop and grow. The share price of a company is the current buying price for each share and will rise and fall over time depending on its financial performance and growth. Owning shares will also entitle you to any dividends declared by the relevant company. A dividend is a payment made, typically twice a year and the amount paid depends primarily on the company's financial performance in the previous period. Dividends can be viewed as a reward for your continued support of the company by owning their shares.

What are bonds and gilts?

Bonds are issued by governments and corporations when they want to raise money. If you invest in bonds you are lending your money to the government or corporation with a specific date when the face value of your loan will be repaid. Bonds issued by a government are also referred to as Gilts as it is considered a gilt-edged investment i.e. more secure. A bond will also pay a fixed amount of interest, known as the 'coupon rate' over the bond term.

The value of a bond will vary over time and can be bought and sold, similar to shares. The value of a bond will vary depending on how favourable the interest paid (coupon) is compared with the return available on other investments.

What are commodities?

Commodities are raw materials. You may come across terms like hard commodities and soft commodities when doing your research. Hard commodities are typically mined, while soft commodities are grown. Popular examples of hard commodities include gold and silver. Soft commodities are things like wheat, rice and coffee. Commodities can be traded on exchanges like other assets. Some people prefer to accumulate certain commodities physically, i.e. by buying gold bullion coins. Others opt for buying up funds which provide exposure to commodities or buying shares in commodity-based companies.

What is a fund?

Funds are an easy and convenient way to invest and are a popular investment vehicle for novice investors. A fund is simply a pool of money from a number of investors where the fund manager invests in various types of assets depending on the investment objectives of the fund. When you invest in a fund you buy units in that fund, the value of which can go up and down with the performance of the underlying assets. These assets could be shares, bonds or any other asset.

With a fund manager making the investment decisions, investing in funds takes away much of the pressure of choosing and managing your investments and for this service, a management fee will be deducted from your investments.

There are a variety of funds available, investing in a broad range of asset types across many different geographical locations. When you start investing, you'll come across mutual funds and exchange traded funds (ETFs). They both offer the opportunity to invest in a variety of assets thereby diversifying your investments and lowering your risk. However, there are subtle differences between the two which we discuss in our article "What is an ETF?".

How much money can I make investing?

It is difficult to give an exact figure regarding the expected return on your investment as this will primarily depend on two factors:

• the level of risk you are prepared to take with your investments
• the time your investments are left to grow

Typically, the more risk you take, the higher the rewards you can expect if the risk pays off. However, there is a balance to be struck. Very high-risk investments, such as penny stocks, can sometimes pay off, but the risk of losing all your money is significant. In some ways, very high-risk investments are similar to gambling. Read our article "A guide to risk and volatility when investing".

Past performance isn't an indicator of future performance and as such should not be used on its own to make investment decisions. That said, to give you an indication of how assets have performed historically, the S&P500 has returned around 10% on average each year after its inception. Some years, the returns reflect huge growth, while other years, there are large losses. In 2022, for example, the S&P500 fell by 18% while in 2019, it grew by more than 30%. Being invested for a long time ensures you can ride out the losses as well as the growth to achieve a decent return.

Is investing right for me?

Whether investing is right for you depends on how risk averse you are and what your goals are. Typically, investing is designed to grow your money over the mid to long term. Therefore, it's a good option if you're looking to put your money away for more than 5 years so you can benefit from the growth over time. You'll normally be able to access your funds whenever you want, but to see growth and mitigate the risk that comes with investing, a longer term outlook is a better idea.

The other thing to remember with investing is there is always some risk involved. With savings, you might be guaranteed a specific interest rate. But, with investing you could get less than you put in even if you invest in lower-risk funds and steer clear of riskier assets like individual shares.

Although there is more risk involved with investing this should not put you off from making a start, as it is one way of protecting your money against the effects of inflation over the long term and it can offer bigger returns than most savings products, particularly as interest rates are falling across the board.

You can start your investment journey with just a small lump sum or a low regular monthly investment, where you put away however much you can afford. Modern investment platforms allow you to start investing with as little as £1.

When should you start investing?

The first step is to understand where your monthly income is presently being spent by creating a budget. If you read our article "Big picture budgeting" you will see how simple it is to create a budget and understand where you are spending your money. The great thing about creating your budget is that you will then have complete visibility over your spending habits and where you are wasting money on impulse buys or too many takeaways. If you can curb your spending in these areas then you will have some 'free' money to start investing. Once you have created a budget there are a number of excellent budgeting apps that will keep you on track, find out more by reading our article - "The best budgeting apps in the UK: How to budget without trying"

Once you have some 'free' money every month you should first focus your efforts on building an emergency fund. This emergency fund is to help cover any emergency expenses that always seem to scupper your plans to live within a budget. This emergency fund should ideally be between 3 to 6 months of net income. To find out some great tips on building up a cash buffer read our article - "Building an Emergency Fund - the what, why & how"

Now you have your finances in order you can start to build for your long term goals by learning about investing and how it can help you to reach these goals.

How do I start investing?

The best place to start investing for a beginner is to take advantage of the tax-free investments available such as a pension (SIPP) or an Individual Savings Account (ISA). Think of them as tax-advantageous boxes into which you place your investments.

1) Choose your investment wrapper

Most people choose to invest via a Stocks and Share ISA or pension (such as a SIPP). Below I give a brief description of how each one works.

What is an ISA?

An ISA is a personal saving plan that allows you to save a maximum amount of £20,000 in a tax year.

There is no Income Tax or Capital Gains Tax payable on the interest or returns on your ISA investment.

There are 4 main types of ISA available:

• Cash ISA - where the investment is held in cash
• Stocks & Shares ISA - where the investment is held in shares or funds
• Lifetime ISA - designed for saving to buy a home or towards an income in later life (separate rules apply, check out our article Lifetime ISAs explained)
• Innovative finance ISA - instead of cash or stocks and shares, an innovative finance ISA uses peer-to-peer lending to match investors who are willing to lend, with borrowers.

Once you have decided upon the product to invest via (pension or ISA) you then need to go about deciding which investments to put into it. For most people who are already contributing to their employer's pension scheme, perhaps via auto-enrolment, they would usually choose to invest via a Stock and Shares ISA.

What is a SIPP?

A SIPP is a personal pension plan where the investment choice is made by the plan owner. Investment can be made in a variety of assets but investing in funds is by far the most popular choice. A SIPP can be started and managed online and changes can be made anytime.

Benefits from a SIPP cannot be accessed until the owner reaches the age of 55.

Contributions into a SIPP attract tax relief at the plan owner's marginal rate of tax. All contributions will be increased by 20% basic tax relief however higher and additional rate taxpayers can claim the additional relief through their annual tax return.

You may already have a pension scheme available through your employer so make sure you have joined the scheme. If your employer is also paying into your scheme make sure are taking full advantage of this benefit. For more information read our article "The best & cheapest SIPPs"

2) Choose your investments

When choosing which investments to place within your SIPP or Stocks and Shares ISA you have two options. Firstly you can choose to get someone else to do all the hard work for you and choose not only the asset mix but also the individual funds to invest in. Alternatively, you could choose to do it yourself (the so-called DIY option).

You will notice that we mentioned investing in funds rather than investing directly into assets such as shares and bonds. That's because investing in assets via funds not only reduces the costs involved, as you benefit from economies of scale, but it also helps to reduce investment risk. Using funds you can still invest in almost any asset you want to including bonds and shares. Funds can be managed actively by a fund manager and designed to beat the market (known as active funds) or passively where they're designed to track the performance of a particular index such as the S&P500 or FTSE100. Active funds come with the potential for higher returns but are typically more expensive.

Our investment portfolio calculator can give you an idea of the sort of portfolio you might build from different assets assuming that you have a medium risk profile. Of course, the ultimate portfolio you may choose depends on your attitude to investment risk, your investing timeframe, your age and your investment goals. If you are unsure or not confident about selecting your own investments then you should seek the help of a financial adviser or one of the growing number of online investment solutions. Additionally, the likes of Wealthify, J.P. Morgan Personal Investing and Wealthify can recommend a portfolio with an ISA or pension. These services will then monitor, review and adjust your portfolio in accordance with its stated mandate and risk target over time. You do not have to do anything at all. We have created a best-buy table of these online investment propositions, which includes our rating for each of them along with links to full reviews of each service.

If you would rather invest your own money yourself then you need to be comfortable with managing the investment risks involved. In order to start investing your money you will need to pick an investment platform, such as Hargreaves Lansdown* or Interactive Investor*, and open SIPP or Stocks and Shares ISA with them. You would then pick and choose the Investments (i.e. funds) you want to hold within the SIPP or ISA. Investment platforms such as Hargreaves Lansdown and Interactive Investor also provide a range of research and funds shortlists to help you. However, we suggest you also carry out your own research using services such as Morningstar or our own 80-20 Investor service. For more information read my article "How to get the best return on £50,000".

 

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.

If a link has an * beside it this means that it is an affiliated link. If you go via the link Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. But as you can clearly see this has in no way influenced the above editorial. The following links can be used if you do not wish to help Money to the Masses or take advantage of the exclusive Money to the Masses offers - Hargreaves Lansdown and Interactive Investor.