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Tales of stellar gains from the stock market may make you wonder why you are sticking to cash accounts, particularly with interest rates in the doldrums. Yet while you want to make the most of your money, knowing where to start as a novice investor is daunting.
The golden rules
The first thing to ask yourself is how you would feel if you lost money – if you are prepared that your investment may fall in value, the stock market may be a good option for you to consider. However, if the very thought gives you sleepless nights, stick to the safety of cash savings.
Secondly, you must be willing to leave your investment alone for the medium term, of preferably five or more years. Your investment needs time to ride out the troughs of the market – so don’t think you can make big gains in short periods.
If you’re happy proceeding, you can start to choose the right investments for you.
What to buy?
There is an array of different assets or types of investment available - but let’s start with the most popular among first time investors:
Shares: You could invest in individual shares in companies you know and understand, but this carries a high risk. You are buying a stake in a company, which may pay a regular income to its investors in the form of a dividend. These payments are typically made twice a year. You can withdraw the cash or use this to buy more shares. However, ploughing returns from dividends can dramatically bump up returns over the years.
Funds: Alternatively, investment funds avoid putting all your eggs in one basket. Funds such as unit trusts and open-ended investment companies (OEICS) spread risk among typically 50-100 companies.
Equity income funds can make a good first pick for those looking to invest in a spread of companies with healthy dividends. They typically invest in a wide range of FTSE 100 companies. They are run by professional fund managers, who buy and sell individual stocks within the fund. This way, you avoid the worry of making these decisions yourself.
There are plenty of complicated investments that require a greater depth of investment knowledge. For example, spread betting and day trading – but these are best left to the professionals.
How much to invest
This depends on your savings elsewhere. As a general rule, you want to hold a spread of investments. You should ideally hold several months’ worth of salary in a cash account for a ‘rainy day fund.’ Once this is in place, you can dabble in the stock market.
Perhaps start by investing smaller sums, of as little as between £25 and £50 a month. You can always build this up over time.
Remember; if you lose money after taking investment advice from a regulated financial adviser that has stopped trading, FSCS may be able to compensate you up to £50,000.
Lump sum or regular savings
Without the help of a crystal ball, it can be impossible to know when to invest. One of the big decisions you’ll face is whether to invest all your money in one go, or drip feed it into the stock market over time.
Which is best for you depends on circumstances, and your attitude to risk. If you are nervous about timing the market, regular savings is a sensible option. By drip-feeding money in, you can reduce the risk of market timing – if the market falls, your money will simply buy more shares at a cheaper price the following month. This should even out returns over your investment timeframe.
Where to buy?
There are plenty of DIY investment platforms that work similarly to an online supermarket, offering a range of investments from different companies. You can buy these are keep them in one place, often at a reduced cost.
There are tips and tools for how to build a portfolio, with examples depending on your goals and attitude to risk. Check and compare dealing fees, charges, and any other costs.
Consider your costs
Buying funds, trusts, or shares involve paying fees that can eat up a sizeable chunk of returns. But these vary widely depending on the investment and the size of your portfolio. Here are some of the most common you will come across:
Annual management charge (AMC): A yearly charge for a fund, typically around 0.75%. However, if you are buying through a platform this is often reduced. Also, if you choose a basic tracker fund following the FTSE 100, say, you will pay much lower charges.
Platform fee: This is the yearly cost of administration for the fund on an investment platform. Charges range upwards from around 0.3%.
Ongoing charge: This can be a useful comparison tool, as it includes various charges. Typically, this adds around 0.85% to 1% on top of the annual charge.
Individual Savings Allowance (ISA)
Whatever you pick, remember to use your ISA, currently at £15,240 a year. This is the most tax-efficient way to start investing, and makes your financial affairs simpler as your account won’t need to be detailed on a tax return.
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Money Means is a news and information series written by independent financial and consumer journalists and experts. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.