Getting started with investing

• Funds

  What is a Fund? A fund is a pool of money collected from multiple investors and managed by a professional fund manager. Funds can invest in various assets, such as stocks, bonds, or property, offering diversification to investors who want to spread their risk.

  There are two main types of fund - actively managed and passive. Actively managed as the name suggests are funds that are actively managed by investment professionals in an attempt to beat their benchmarks. Passive funds, or index tracking funds as they are more commonly known, on the other hand are designed to closely track the performance of markets or specialist sectors. The latter tend to be more cost-effective as they are run by computers.

• Shares

  What is a Share? A share represents ownership in a company. When you buy shares, you become a shareholder and have a claim on the company's assets and profits. Shares are typically bought and sold on stock exchanges. Holding shares in a single company is, by its very nature, far more riskier than investing in a fund or an ETF.

• Exchange Traded Funds

  What is an Exchange-Traded Fund (ETF)? ETFs are low-cost investment funds that are traded on stock exchanges, similar to stocks. Typically, they track indices like the FTSE 100 or the S&P 500. They offer diversification like funds but are more flexible and can be traded throughout the trading day.

• Investment Trusts

  What is an Investment Trust? Investment Trusts are publicly traded on stock exchanges, which means their shares can be bought and sold like any other stock. They can offer investors exposure to a wide range of assets and markets, and they often provide a way to access professional investment management.

  Unlike funds, Investment Trusts are closed-ended, which means they have a fixed number of shares. This can lead to differences in pricing between the share price and the underlying value of the trust's assets, known as the premium or discount.

  It's worth noting that while Investment Trusts can be a good way to diversify and access professional management, like any investment, they come with risks, and it's important for investors to carefully consider their options and goals.

1. Equities (Shares)

   Equities represent ownership in a company. When you own a share of stock, you have a claim on a portion of the company's assets and earnings. They are traded on stock exchanges.

2. Corporate Bonds Corporate bonds are debt securities issued by companies to raise capital. When you buy a corporate bond, you are essentially lending money to the company in exchange for periodic interest payments and the return of the bond's face value at maturity.

3. Government Bonds (Gilts)

   These are debt securities issued by the government. In the UK, they're known as "gilts". When you buy a government bond, you're lending money to the government in exchange for periodic interest payments and the return of the bond's face value at maturity.

4. High Yield Bonds (Junk Bonds)

   These are bonds issued by companies with lower credit ratings. They offer higher yields to compensate for the higher risk of default. They can be more volatile than investment-grade bonds.

5. Property

   Property investments involve purchasing real estate, such as residential or commercial buildings, with the aim of generating rental income and/or capital appreciation. Real Estate Investment Trusts (REITs) are a common way to invest in property.

6. Commodities

   Commodities are physical goods like gold, oil, or agricultural products. They can be traded directly in the commodities markets or through derivative instruments like futures contracts.

7. Cash (Money Market Instruments)

   Cash investments include highly liquid, low-risk assets like savings accounts, and short-term government securities. They offer lower returns but are considered very safe.

Each of these asset classes has its own risk-return profile, and a well-diversified portfolio often includes a mix of these to spread risk. It's important to carefully consider your investment goals, risk tolerance, and time horizon before deciding on an allocation. Consulting with a financial advisor can be beneficial in making informed investment decisions.

What is an Individual Savings Account (ISA)? An ISA is a tax-efficient savings account available in the UK. Think of it as a tax-efficient wrapper, into which you can invest money in various investment vehicles, like funds, ETFs, shares and cash, without paying capital gains tax or income tax on the returns you earn within the ISA. If you have money to invest, you should look to use your annual ISA allowance (currently £20,000 per person) before investing directly into funds/ETFs or shares. For more detailed information on ISAs, click here.

What is a Junior ISA? A Junior Stocks and Shares ISA account is a tax-efficient way to save for your child's future as you pay no income tax or capital gains tax on your investments. The Junior ISA allowance for the 2023/2024 tax year is £9,000, and you have until 5 April 2024 to use it. Once your child reaches 18, they can access the money in their Junior ISA.

• Diversification

  Don't put all your eggs in one basket. Diversifying your investments across different asset classes reduces risk.

• Risk Tolerance

  Assess your risk tolerance based on your financial goals and ability to withstand market fluctuations. Riskier investments may yield higher returns but come with greater volatility.

• Long-Term Thinking

  Investing is for the long-term. Time in the market often matters more than timing the market.

• Start Early

  You don't have to have large sums of money to start investing. You can invest from as little as £25 per month. You can then top up with lumps sums later as and when you have funds available.

• Managing Your Debt

  Before diving into investments, consider paying down high-interest debts like credit card balances. High-interest debt can erode potential investment returns.

• Emergency Cash Savings

  Create an emergency fund with enough savings to cover at least three to six months' worth of living expenses. This fund provides a financial safety net for unexpected events.

• Planning for life's big purchases

  Whether it's a deposit towards buying your first house, the car of your dreams, an expensive wedding or an exotic holiday abroad, it's a great idea to start building funds for life's luxuries early.

• Planning for Retirement

  Start planning for retirement early. Consider contributing to workplace pension schemes, personal pensions, or ISAs designed for retirement savings. The earlier you start, the more time your investments have to grow.

Compound growth is the phenomenon where your investment earns returns on both the initial principal and the accumulated earnings. Over time, compounding can significantly increase your wealth. Start investing early to harness its full potential.

Diversification is key to managing risk. A diversified portfolio includes a mix of assets like stocks, bonds and potentially other assets like property, precious metals, commodities and cash. Examples of portfolio strategies:

• Cautious

  Emphasizes low-risk investments like bonds and cash.

• Balanced

  Balances risk and reward with a mix of stocks and bonds.

• Adventurous

  Favours higher-risk assets like stocks for potential higher returns.

Clearly define your financial goals, whether it's buying a house, funding education, or retiring comfortably. Assess your risk tolerance to align your investments with your objectives and make sure that you regularly review your portfolio to ensure it aligns with your goals and risk tolerance.