Investing essentials

Investing can seem very complicated. In this guide, we've covered the basics from investing essentials, to understanding the different risks and approaches.

What is investing?

In its simplest form, investing is when you buy an asset (traditionally a share of a company) at a certain price, hoping that the value of it increases over time. If the asset increases in price, the buyer can sell the asset and make a profit. However, the asset may also fall in price, and if it is sold at that price, the buyer would lose money on their investment.

However, that really is a simplistic explanation and there’s a lot more to investing, especially these days. If you have access to the internet, you will have noticed there’s been an explosion of other forms of investing in recent years. Cryptocurrency, sports players, limited edition clothing and collectables are all things you can now buy and trade like you would a share in a company, and there are lots of individual complexities to each of them.

Although these are all ways to improve your financial situation and are classed as different types of investments, this is not what we’re going to focus on in this article. Instead, we’re going to cover the more traditional, regulated side of investments to get you started.

What are the risks of investing?

Investing always has an element of risk, that’s why investment companies use the term ‘Capital at risk’ when advertising their services. This term is used to warn potential customers that the money (capital) you invest can rise or fall in value, and you may get back less than you put in. But as with anything in life, where there’s some risk, there’s also some reward!  

Each different form of investing has a different risk profile, meaning it is perceived as more or less risky. Investing in Cryptocurrency for example, may be seen as a high-risk investment due to the volatility of the currency. However, investing in a diversified investment portfolio, although still an element of risk, would be seen as less of a risk than cCryptocurrency.

Even though there is always a risk involved when investing, there are ways to reduce this risk. The best way to reduce risk is through diversification of your investments.

How much risk is right for me?

What are the different ways to invest?

Investing has become increasingly accessible over the past decade and there are a few ways to go about it. You could start totally on your own by doing direct trading, or you could do it with some help and use an investment platform. You could even work with a financial adviser and get them to do it all on your behalf.

Each type of investing has its benefits and drawbacks. If you are confident enough to pick your own stocks, with a bit of luck, you could see impressive returns. However, there is more risk and effort involved in doing so, so most investors choose funds or get financial advice and let the experts do the work. Here’s a more detailed look at each:

Investing: Direct trading (do it yourself)

There has been a recent surge in companies and apps that allow you to directly trade stocks and shares, these include the likes of eToro, Freetrade and Trading 212. These platforms are becoming increasingly popular as they are easily accessible, and they don’t do any checks to ensure the person investing is in the financial position to do so, meaning almost anyone can use them.  

These companies let you buy and sell shares with ease through an app. It’s like online shopping, but you’re choosing which companies you want to buy a slice of. These apps sometimes give guidance on what stocks to buy or sell, but they don’t give financial advice. Ultimately, it’s down to you to decide which company you want to invest in.  

A lot of the direct trading platforms allow you to make free trades, meaning the cost can be pretty low. However, after so many trades you can start to be charged per trade. If you trade often, your costs could start to add up.

Investing: Investment platform (do it with some help)

A fund is a collection of assets, usually of the same type, that are bundled together. Investors can buy a share of that fund and they’ll receive their share of the dividends paid out by the fund. For example, you can invest in funds that track specific stock markets like the FTSE 100 or funds that track tech companies in Silicon Valley.  

Funds are a great way to quickly diversify your investments, but you will still need to do the research on what funds you want to invest in, but you won’t have to buy and sell your investments as a fund manager will do this for you.  

There are generally two types of funds, actively managed and passively managed. Actively managed funds have extensive research teams and fund managers who make investment decisions based on what they think will perform best. Passively manged funds however aim to track the performance of a specific market such as the FTSE 100 and don’t have to cover the costs of expensive fund managers or research teams meaning that they are much cheaper to invest in.   

Funds usually have a fund charge which is charged as an annual percentage of the value of your investment. Generally, funds are more expensive than investing directly because you must cover the cost of the ongoing annual charge.  

Investing: Financial advice (get someone to do it for you)

Another way to begin investing is through financial advice. Financial advisers can help you with many financial topics, but investing is one of the more popular things they advise on. An adviser will look at your overall financial wellbeing and ask you about your financial goals and risk appetite. Once they have a picture of where you are and where you want to be, they’ll recommend the best way for you to reach those goals, whether that’s to invest or not.  

If you are able to invest, an adviser would recommend where you invest your money in order to reach your goals, often by building a portfolio of investments. Some advisers are independent which means that they can advise on the whole of market across various products and investments, whereas restricted advisers can only give advice on their own products and investments.   

Traditionally advice has only been accessible to those who have a lot of money to invest, but OpenMoney are here to change that! Financial advice usually comes at a cost and this can be in the form of a one-off fee or an annual fee, sometimes a combination of both. Here at OpenMoney we’ve made financial advice accessible and affordable. Our initial advice is free and you only pay us an annual fee when you invest with us. When you do invest, our fees are super low too. Why? Because we want them to be.

How long should you invest for?

There isn’t a maximum amount of time you should invest for; however, we would always recommend that you do invest for a minimum of 5 years. This allows you to ride the potential ups and downs you might see when investing.

To decide what’s best for you, you need to think about your financial goals. If you’re 25 and saving for a planned early retirement at 55, you should invest for 30 years. If you’re saving to pay for your children’s education in 18 years, you’d invest for 18 years.

However, if you were saving for a holiday to Las Vegas for your 30th next year, then we wouldn’t recommend investing that money at all. The money you put into your investments could be higher or lower than you started with when it comes to next year, so you’d be better keeping it in a cash savings account. But if you had a longer time period to play with (e.g. over 5 years), there’s less chance of you losing money as markets tend to rise over time.

There’s a common phrase in the investing world that sums up why you should invest over the long term. The phrase is ‘It’s not about timing the market, it’s about time in the market’. So, what exactly does that mean? 

Many investors try to time the market (buying low and selling high) to get quick returns. The coronavirus pandemic was a great example of this. When markets began to fall in March, many people will have pumped their money into shares and investments, hoping that the markets recovered quickly, which they did. Investors do this by monitoring share prices very closely and trading when they see an opportunity. They then move onto the next one. This strategy can be riskier as you never know what will happen to a share price.

On the other hand, if your focus is on time in the market, chances are that the value of your investments will go up over time. And as history shows, the value of stock markets do rise over time. So, when you’re thinking about how long to invest, a general rule of thumb is; the longer the better.

How much does it cost to invest?

All types of investing come at a cost and how much you pay can impact your returns. The different types of investing we covered earlier all come at a different cost.

Directly trading stocks and shares is one of the cheapest ways to invest, with many apps offering free trades as an incentive to start investing. However, these offers are often limited and if you’re looking to trade frequently and often then the cost can start to add up. Some providers can charge anything up to £10 per trade, meaning you’ve already ate into some of your returns.

Investing in funds or getting a company to manage your investments would usually cost more as you are being provided a service as well as paying investment costs. Some of the common fees you will see when investing are:  

  • Investment charges – Charges for the management of your investments including researching and selecting funds.
  • Platform fee – Fees to use the investment platform (website or app).
  • Admin fee – Fees for administration costs such as maintaining records.  

When comparing platforms and companies, try and find their total charges figure. This should include all of the charges you face when investing and will allow you to compare investment providers side-by-side. Even though investment fees might sound low as they are expressed as a percentage, they can eat into your returns. Here’s an example of how costs can impact your returns.  

  • Example 1  

You invest £20,000 towards your retirement and leave it for 30 years. The investment earns 7% per year and your fees are 0.5%. After 30 years, you’d have £132,286 after fees. The fees will have cost you £19,957.  

  • Example 2  

Consider the same scenario, but your fees are 2% instead of 0.5%. After 30 years you’d have £86,438. The extra fee charges have cost you £65,804 and you're £45,848 worse off.  

The above examples are representations and do not reflect the returns you could see when investing and are for illustrative purposes only.

A higher fee can impact your returns. When investing, if you look after the percentages, you can save (and earn) some pounds.

At OpenMoney our total charges are less than 0.51% per year and include ongoing advice, management of your investments and access to our free money management app.

Remember, capital is always at risk when investing.
Fees correct as of 20/04/2022 and may exceed the stated value.

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