Beginners guide to investing

If you haven't invested before our investing for beginners guide can help you learn the basics. Whether you’re planning to build a nest egg, investing for your children or planning for a wealthier retirement. Start by taking the first step.

This guide can help you to …

  • Understand the basics of investing
  • Know if investing is right for you
  • Make your money work harder
  • Learn how to get started and understand the risks

Step 1: What is investing?

Investing is a way of putting aside money for your future and getting it to work for you. When you invest, you’re buying an asset that you believe will increase in value over time. However, with investing there are no guarantees so you could get back less than you invest.

When you start to invest you don’t need a large sum of money, you just need to be comfortable with the amount that you wish to invest.

There are a number of ways that you could choose to invest, including stocks and shares and funds.

Step 2: Why invest?

Choosing to invest can depend on your financial goals and how you want to achieve them. Whether you want to invest for the future or generate an income. Investments can involve more risk than a savings account and can fall as well as rise.

Saving in cash accounts offers a secure way to save for the future, and the interest rate on offer is also a way to provide additional income. However, with inflation over 1.5% it can reduce your return and savings valuation with many cash savings accounts and current account tracking The Bank of England base rate.

The table below shows the possible impact of inflation. Investing comes with more risk than a savings account.

Average inflation

What £1,000 will be worth in real terms

After...

2.5% inflation

5.0% inflation

7.5% inflation

10.0% inflation

After...

5 years

2.5% inflation

£884

5.0% inflation

£784

7.5% inflation

£697

10.0% inflation

£621

After...

20 years

2.5% inflation

£610

5.0% inflation

£377

7.5% inflation

£235

10.0% inflation

£149

After...

40 years

2.5% inflation

£372

5.0% inflation

£142

7.5% inflation

£55

10.0% inflation

£22

Step 3: What’s your investment goal?

Investing for income

If you want to generate income from investing you can do this by choosing investments that make regular payments. For example, shares pay dividends and bonds pay interest.

Investing for income is usually for investors that wish to supplement their pensions.

Investing for growth

The aim of investing for growth is to increase the value of your initial investment. This is known as capital gains. For example, if you were investing in stocks and shares the growth would be a result of the increase in price of the shares.

Compound growth

An example of compound growth is when you re-invest dividends, over time this may generate extra earnings. The asset accrues growth from both the initial investment and the added earnings which is know as Compound growth.

The majority of investors will look at investing for both growth and income, for instance an income investor could reinvest their income with the aim of generating growth and a growth investor could sell their holdings to gain an income from their investment.

Step 4: Investment options

Shares

If you purchase a share you are buying a unit or stake in a company. Shares are traded on the stock exchange and the price of a share can rise and fall throughout the day.

  • Pros: Capital gains

If you choose your stocks wisely, they could increase in value over time. Shares have historically provided greater returns than cash if you invest for a longer term (5+ years), although this isn't guaranteed.

  • Cons: Capital losses

If you invest in a company that isn't growing in value then the share price could fall. This could result in you losing money on your investment.

Funds

Unlike a share, when you own a slice of a company, a fund is a collective investment which means your money is spread over a range of different markets, sectors and investment types. Funds are managed by professional Fund Managers who choose where to invest your money. You buy units in a fund which can either rise or fall in price.

  • Pros: Diversification

Funds have their holdings spread across different sectors, markets and stocks which can reduce the risk. If one holding performs poorly over a certain period, other holdings may perform better which reduces the potential losses of your investment portfolio.

  • Cons: Liquidity

A fund manager may have to sell holdings to pay investors back who are exiting the fund. If the assets they hold are difficult to sell - such as property - then this can mean delays in getting your money back.

Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) trade on the stock exchange just like shares. But unlike shares which focus on one company, an ETF tracks an index, sector, commodity or currency and will invest in a range of assets with the aim of closely tracking its performance.

  • Pros: Lower fees

One of the major benefits of an ETF is its cost effectiveness. They can offer lower fees than managed funds as they have lower operating costs.

  • Cons: Performance

An ETF will track a market which unlike funds are actively managed to try and outperform the market. This can impact the performance.

Please note: We are not able to trade or hold US listed ETFs.

Investment Trusts

An investment trust is a company that raises money by selling shares to investors and then pools that money to buy and sell a wide range of shares and assets. Different investment trusts will have different aims and different mixes of investments.

  • Pros: Liquidity

Investment Trusts don't have to sell assets when investors exit the fund. This means an investor should be able to sell their holding easily on the stock market. However, the price could go down if more units are sold than bought.

  • Cons: Potential Price Volatility

The price of investment trusts can be influenced by the demand for the share itself. If investors feel the investment trusts isn’t being managed well then this can directly impact the price as more investors will wish to sell rather than buy.

Bonds and Gilts

Bonds and gilts are a way for companies or governments to raise money by borrowing money from investors. If you invest in a bond or gilts you are lending money to a company or government in return for a fixed rate of interest.

  • Pros: Stability

Bonds and gilts are a more stable investment than stocks and can provide a steady return with lower risk.

  • Cons: Growth Potential

The disadvantage of bonds and gilts is that they don’t always offer higher long term returns in comparison to other stocks. The value of bonds and gilts can also be impacted by economic uncertainty, currency fluctuations and changes to interest rates.

Explore our easy to read articles which are designed to help you with your investment options.

Boost your skills

Step 5: Ready to start investing?

Now that you’ve reviewed the steps, you may feel ready to invest. Before you make the next step, please read the following statements and check that you agree with all of them:

  • You have at least three to six months net income in an easy access account to cover any emergencies and planned spending over the coming years.
  • You are happy to accept some risk in investing.
  • You are prepared to invest for at least 5 years.
  • You don’t have any significant short-term debts, as they are likely to cost you more in interest than the amount of any growth you may receive on your investment.
  • You’ve carried out your own research and you feel confident that you are ready to invest.

Ways to invest

Bank of Scotland Share Dealing Service is operated by Halifax Share Dealing Limited. Registered in England and Wales No. 3195646. Registered Office: Trinity Road, Halifax, West Yorkshire HX1 2RG. Authorised and regulated by the Financial Conduct Authority under registration number 183332. A Member of the London Stock Exchange and an HM Revenue & Customs Approved ISA Manager.