Investing money - the basics

What you’ll learn:

• Whether you should save or invest
• What you can invest in
• How diversification can help reduce risk.

If you're new to investing, you'll need to ask yourself a few questions before you get going. A good starting point is to ask yourself why you're investing, what you want to get out of it and how long you're planning to invest for. You'll also want to be sure how you feel about taking risks, how much money you can afford to invest and how much you can afford to lose.

Should I invest in the stock market or put my money into a savings account? For many people, the answer to this is probably a bit of both. Money you save into a bank account is money that you can dip into when you need it. Your capital – the amount you put in – is normally safe, and you might get some interest on top. The problem is that the cost of living often rises faster than the interest you get, so over time the purchasing power of your money can reduce.

When you invest, you're trying to make your money grow by buying investments such as shares, which you expect to increase in value. There are thousands of different investments to choose from, but you'll need to accept the risks involved. You could find that your investment doesn't grow, or you might get back less than you put in.

Find out more about saving and investing.

What can I invest in?

Investing involves buying financial assets such as shares, government and corporate bonds and property.

There are other types of assets as well. For example, you might want to invest in a foreign currency, or commodities like gold, coffee or oil. You could even put your money into what are known as 'alternatives' such as art, antiques or wine. Some of these investments carry very high risks and can be difficult to sell.

Understanding returns

The main reason for investing and taking on additional risk you wouldn't have if you kept your money in cash, is the hope of making higher returns. If you're investing for growth, the aim is that the investments you put your money into will increase in value over time. If your investment goal is a long way in the future, you may be prepared to accept a higher level of risk, because if you suffer financial losses, you will have more time to recover your position. However, with any form of investment, you should only commit money you won’t need to access in the short term, and money you could afford to lose. If you want to generate an income from your investments, you might put some money into assets that pay dividends – a share of a company's profits paid out to shareholders. Also worth considering are bonds and gilts – loans to companies or the government that pay interest.

What about risk?

Regardless of where you invest, there's always some risk involved, although the level of risk varies depending on what you invest in.

You can manage risk to a degree by building a diversified portfolio. Diversifying is done by spreading your money across different types of investment. This can help lower the overall risk of losing money (but that could reduce the extent of your potential gains), because diversification acts to even out the size of losses and gains.

A popular way to do this is by investing in funds. These are 'collective' investments where your money is pooled with other investors and invested by a fund manager. It can be a good way to invest in lots of different things quickly, without having to do the research and legwork yourself.

It's important to remember that any investment can go down in value as well as up and while more risk often means the chance of better returns, it can mean bigger losses, too. That's why it is important to know at the outset how much risk you're comfortable with. If you're not sure, it is worth seeking independent financial advice.

Learn more about reducing unnecessary risk and staying invested.