Use our guide to learn about investments and compare stocks and shares ISAs. Investments can be a great way of making a return on the savings you have, but it's important to understand how they work. The risk involved could also mean that you could lose out.
Investments are a way of getting your money to work harder for you than cash. They describe lots of different of products, or assets, that you can use to get a better return than cash.
Before you start investing it's a good idea to have saved up three to six months’ worth of household bills and expenses in an easy access or instant access cash savings account. You should be able to access this cash without notice, in case you have a household or financial emergency.
Once you have the bills covered, think about reducing or paying off debt. The interest rate on credit cards and loans can be much higher than the return you would get from cash or other lower risk investments.
When you feel that you have your money situation under control, you can start to think about investing for the future. Money that you put into investments should be medium to long term money, not cash that you might need to get yours hands on quickly.
As with any regular savings account, an investment is simply an alternative way to get a return from your money.
However, investments come with element of risk – while you could end up earning a far greater return on your money than with a tax-free wrapper on your savings account, you may not earn any interest at all or even get your original investment back.
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There are many different types of investment available. On the most basic level, you can invest in four main asset classes:
When you buy a stake in, or 'share' of a company, the value of your investment grows or falls as the value of the company increases or decreases.
The value of a company is dependent on a lot of different factors – how its sales are doing, how the economy is performing, whether rivals are offering a better product, and whether taxes and regulations are likely to affect its profits.
When you own shares, you may also receive a dividend from the company's profits, depending on the company you invest in, or capital growth, where you sell your shares for a higher price than you paid for them - find out more about shares.
With a bond, the money you invest is given as a loan to a company or the government. As a lender, you are paid interest on the loan amount, and as such, bonds are more suitable if you require a regular income, rather than long-term capital growth.
Bonds where the money is lent to the government - known as gilts - are considered to be safer and therefore generally pay a lower rate of interest - find out more about bonds and gilts.
Bonds are considered less risky than shares, because if a company were to get into financial difficulty, it would be the bondholders who would be paid before the shareholders. However, bond investments are not as low risk as cash, because there is always the risk that the company may not repay its bond. With cash, so long as your money is in a bank or building society, which is part of the Financial Services Compensation Scheme (FSCS), your deposit will be protected up to £85,000 if the provider were to go bust.
If a company goes bust and it cannot pay its bondholders, they lose out. This is the risk you take with company or corporate bonds, versus cash deposits.
The government issues bonds when it needs to borrow money, and these are known as UK government gilts. Gilt investments are regarded as very secure because they are backed by the government and will always be repaid.
With a property investment, you stand to receive a regular income in the form of rent from a tenant, as well as long-term capital growth if the property increases in value - find out more about investing in property.
Property can be a great investment if you buy in the right place at the right time. But you have to factor in that property is more cumbersome to buy and sell than stocks, shares or bonds. And you will have to pay tax on any increase in its value if the property you are selling is not your main home.
You also need to bear in mind that a rental or holiday let will need to be maintained, and you will need to pay council tax and possibly management fees to a letting agent.
There may be times when the property is empty (void) but all your costs, including a mortgage, will still need to be paid.
The right investment is the one that will help you reach your financial goals, and which doesn't put your money at a greater risk than you feel comfortable with. If you can't afford to lose any of your initial investment (your capital), then cash or gilts is your best option.
If you can afford to tie up your money for a while and are prepared to take a bit of risk, you could opt for bonds and bond investment funds. If you're looking for a better return on your money and you want your investments to have some protection against inflation, then you could consider stocks and shares.
However, these carry more risk to your capital and you should be prepared to ride out the ups and downs, and for this reason they are really suitable only for a medium to long term investment plan.
Start by thinking about what you want to achieve with your investments. If you're saving for a holiday or house deposit, you don't want to take too much risk with your capital, and so cash is your best option.
If you're saving for your retirement, then you can afford to be a bit more adventurous and consider stocks and shares or property. Remember to review your progress regularly to ensure you're right on track to achieve your goals. You could use the services of an independent financial adviser if you feel that a holistic review of your finances would help you decide where to put your money.
One of the best ways to make money when you are investing is to add to your investment at regular intervals. Rather than trying to time the market, you could buy shares in an investment fund every month. Over time, this helps to smooth out the ups and downs of the stock market.
If you're investing in property you need to research your area and market very carefully before you go ahead with the purchase. Talk to people who understand property investment. Be clear about what you're trying to achieve and who you will be letting to.
Property letting can be a reliable source of regular income, but you need to factor in lettings costs, maintenance, damage to the property by tenants, insurance costs and other ongoing expenses.
Tax wrappers are another name for products that you can use for medium to long term savings, where your money can grow free of tax. Individual Savings Accounts (ISAs) and pensions are good examples of tax-free wrappers for your money.
An Individual Savings Account allows any adult in the UK to invest up to £20,000 in any one tax year (From April 6 to April 5 the following year).
There are a number of different types of ISA including, Lifetime ISAs, Cash ISAs, and Stocks and Shares ISAs. They are a good home for long term money as the interest and capital grows tax-free inside an ISA, and you don't have to declare the details on your tax return.
It used to be that Cash ISAs offered the highest interest savings account, but now there is little difference in interest rates between ISAs and best buy instant access accounts. The difference is that your money is protected from tax in an ISA, but since most people have a £1,000 Personal Savings Allowance every year, this is not really an issue.
NS&I Premium Bonds, also known as National Savings premium bonds, investment or savings bonds, premium savings bonds or just National Savings, are a savings scheme from the government.
They encourage people to save by giving them the chance to win a prize while lending their money to the government. Winning premium bonds are revealed each month when all the bonds in issue go into a prize draw.
National Savings Premium Bonds are not strictly an investment or a savings plan. This is because the Premium Bonds from National Savings and Investments are bonds from the government that don't pay interest. Instead there's a chance to win a prize.
They're very popular because there's no risk to your capital, and the chance to win big. However, you might win nothing at all, which would mean they gave a worse return than a low interest easy access account.
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