How to start investing

Key takeaways

• You don't need to be an expert or have loads of money to start investing, even small, regular contributions can grow significantly over time.
• Investing means buying assets like shares, bonds, or funds that you believe will increase in value, though there's always a risk they could go down too.
• Compound growth is when your investment returns start earning their own returns, creating a snowball effect that builds wealth over decades.
• Diversification helps reduce risk by spreading your money across different investments, industries, and countries, funds make this easier.
• Tax-efficient accounts like Stocks and Shares ISAs and Lifetime ISAs let you invest without paying tax on your profits, maximising your returns.

How does investing work?

At its most simple, investing is basically buying something you believe will be worth more in future. If the value of your investment goes up and you choose to sell it, you’ll have made money. If the value of your investment falls and you choose to sell it, you’ll have lost money. It’s completely normal for the value of your investments to fluctuate from one day to the next.

You can invest in all sorts of things, from whiskey and wine to vintage cars and gold. You can also invest in assets like shares, bonds, and funds, which some investors find more accessible and affordable than niche types of investment like art and other collectables.

But what are shares, bonds and funds and how do they actually work?

Shares: A share is a piece of ownership in a company.

Bonds: A bond is when you lend money to a government or company and they (usually) pay you back with interest.

Funds: A fund is a collection of investments and can include shares, bonds, property, cash and commodities.

But what makes investing really powerful over time? It all comes down to something called compound growth. This is when the returns on your investments start earning returns of their own. Think of it like a snowball rolling downhill, the longer it rolls, the bigger it gets. The earlier someone starts investing, the more time compound growth has to work its magic.

One of the most powerful forces in investing is compound growth. This is when the returns on an investment start earning their own returns. For example, if someone invests £1,000 and earns 7% in year one, they have £1,070. In year two, that 7% applies to the full £1,070, not just the original £1,000. Over decades, this snowball effect can turn modest, regular contributions into significant wealth. It’s one of the main reasons starting early matters so much.

What are the pros and cons of investing?

👎 Con: investing won’t help you get rich quick

If you spend any amount of time on social media, you’ve probably seen money influencers talking about how much money they’ve made in the stock market while promising to help you do the same, often for a fee. Even if a content creator’s claims are true, there’s no guarantee that you’ll have the same success.

In fact, the most successful investors tend to be those who’ve consistently invested their money over a number of decades. For example, 99% of Warren Buffett’s net worth - one of the most well-known investors in the world - accumulated after he was 65 years old. His current worth is estimated to be $132 billion, but that wealth has been compounding over time because he’s been consistently putting money into investing since he was 11.

Some will have had a lot of capital to begin with, making it easier to grow their money and take risks that the average person can’t. So if you’re hoping to see life-changing returns in just a few months, it’s worth adjusting those expectations but that doesn’t mean investing isn’t worth it. But if you consistently invest, even a small amount of money, over a number of years, you are more likely to see a return on your investments.

Remember, investments can go up as well as down. Past performance is not a reliable indicator of future results.

👍 Pro: you can build wealth over time

Although investing in the stock market won’t make you rich overnight, it’s one of the best ways to build wealth over a longer period of time.

If you start investing today, contributing £200 a month for 20 years, your portfolio could be worth £81,491 by 2044 if you have an annual growth rate of 5%. You’ll have invested just £48,000 of your own money during this time and you’ll have seen your portfolio grow by £33,491. And that’s with a modest investment growth - over the last 10 years the average return on Stocks and Shares ISAs has been 9.64% annually.

Make the same monthly contribution for 30 years and the results are even more impressive! If we assume the same 5% annual growth rate, your portfolio could be worth £163,739 at the end of this period, despite having contributed just £72,000 of your own money during this time frame.

Learn more: Do I need a financial advisor?

👎 Con: There are no guarantees

Although investing can be a great way to build longer-term wealth, there are no guarantees. The value of your investments can go up and down over time and there’s no guarantee you’ll get back what you put in.

👍 Pro: you can reduce the risk with diversification

One of the biggest mistakes that new investors make is putting all their eggs in one basket aka investing all their money in just one or two companies. If the companies you’ve invested in go bust, you could lose everything.

Thankfully, you can reduce the risk by building a diversified portfolio made up of a wide variety of investments from multiple industries and countries. A convenient and effective way to do this is by investing in funds, rather than individual stocks, as it helps to spread the risk of your investments across lots of companies.

Quick recap, what is a fund?

A fund is a collection of investments which are selected by a stock market expert or a robo adviso, an automated platform that manages investments on your behalf.

Learn more: Top 5 financial advisors in the UK.

👍 Pro: investing can help you beat inflation

Investing is much riskier than keeping all your money in cash, but over long periods of time it tends to be more effective at reducing the impact of inflation.

When interest rates are low, the return you get on your savings is unlikely to keep up with the rising prices of goods and services. No matter how much money you save each month, your purchasing power will fall over time.

While savings accounts can offer a decent return when interest rates are higher, the rates we earn on cash savings don’t always keep up with inflation. Checking the Bank of England’s base rate is a good starting point, but it’s worth remembering how quickly things can change. Back in November 2008, the base rate fell to 3% as a result of the global financial crisis. It continued to fall below 1% for more than a decade, reaching lows of 0.10% in March 2020. It wasn’t until the end of 2022 that we finally saw the return of interest rates of 3.50% and above.

Unfortunately, the inflation rate can still outpace the interest rates we get on our savings. In April 2023, for example, the inflation rate stood at 8.7%, much higher than the BoE’s base rate at the time, 4.25%.

Learn more: Are interest rates going down?

How to begin investing

Now you know how investing works and the risks to be aware of, how do you actually start?

The good news is that you don’t need to get a degree in finance or a job in Canary Wharf. But before opening any account, it helps to know why you’re investing. Are you growing a deposit for your first home? Building long-term wealth for retirement? Your goals will guide how much to invest, what to invest in, and how much risk makes sense for you.

It’s also worth thinking about your time horizon, that’s simply how long you plan to keep your money invested before you’ll need it. Someone saving for a house in three years might take a very different approach to someone investing for retirement in 30 years.

Once you’ve got a sense of your goals and timeline, the next step is choosing the right account. Investing can be as simple as opening a stocks and shares ISA, answering a few questions to determine how much risk you’re comfortable with, and automating payments to your account.

There are a few different types of investment accounts to choose from:

Stocks and Shares ISA

A Stocks and Shares ISA lets you invest in the stock market without paying tax on your profits. You can invest up to £20,000 in your stocks and shares ISA each tax year or split your ISA allowance across different ISA types.

Stocks and Shares Lifetime ISA

A stocks and shares Lifetime ISA (LISA) lets you invest up to £4,000 a year for your first home or retirement. The government will boost your own contributions by 25%, so you could benefit from up to £1,000 in bonuses each year that you max out your account.

If you want to use your LISA to purchase your first home, remember that since the value of your LISA investments can fluctuate from one month to the next and there’s a chance you could lose money. So you might feel more comfortable saving a deposit in a Cash Lifetime ISA.

Learn more: What is a Lifetime ISA?

General investment account

Stocks and Shares ISAs and LISAs aren’t the only way to invest. You could open a general investment account instead. You’ll still be able to invest in the stock market, but your investment gains may be taxed and this can affect your profits.

No matter which type of investment account you choose, ask yourself these questions before you get started:

• How much money are you able to invest now? It’s okay if the answer is zero! Read our tips on how to start saving money.
• How much can you afford to invest on a monthly basis? Making regular contributions can help to reduce risk and turn investing into a habit.
• Can you afford to lose the money? Only invest money you can afford to lose (not your emergency fund, then).
• How much risk are you comfortable with? The bigger the potential reward, the greater the possibility of losing money.
• What's your time horizon? How long can you leave your money invested? Generally, the longer the time frame, the more risk you can afford to take and the more time compound growth has to work in your favour.

Capital at Risk