A beginner's guide to investing

The world of investing can seem complex at the beginning, and making the right decisions for you and your money can be difficult. This blog will run through everything you need to know...

Our recent Advice Gap report uncovered that 38% of people have never invested, with 17% of those stating that they don’t invest as they wouldn’t know where to start.  

Here we go through some of the basics to get you on the way...

What is investing and how does it work?

The term ‘investing’ simply means to put money away into an asset for a period of time, hoping that the value of that asset increases over time so that you could make a profit once sold in the future. An asset is a term used by investors to describe anything of value or resource which can help make them money in the long or short term. It’s worth mentioning that the value of your assets can fall as well as rise.

To start investing you first first need to purchase a financial product known as an ‘investment’. There are many types of investments such as stocks (buying a portion of a business), property (investing in property to let), bonds (government loans) and exchange trade funds (investment funds that track the performance of an index i.e. FTSE100 etc), the list goes on!  

At OpenMoney, we provide you with a diversified investment portfolio which means that you would be investing in cash, properties, bonds and equities all at once. Our investment portfolio changes depending on the level of risk you are willing to take.

Why should I start investing?

Investing is a great way to help you achieve your financial goals, no matter what they may be. Whether that’s retiring early, saving for a wedding or even if you just wanted some extra cash in your pocket in the future. You should always have a goal in mind when investing to help keep you motivated throughout the process.  

Another great reason to start investing is compound interest. Compound interest helps make your money grow by adding to the interest you have already earned from investing, back into the market. The interest earned ‘compounds’ over time and adds to the value of your investments. It’s a great way to help reach your financial goals quicker.  

Here’s an example of compound interest in action:

If you were to invest £10,000 today for a period of 10 years with an annual return on investment of 5% that compounded every month, the total value after 10 years would be £16,470. Even after one year, you can see the impact of compound interest as the value would be £10,511, even though the returns were 5% (£500). Compound interest can heavily impact the value of your investments, especially when investing over a long time.

An annual return of investment (ROI) is the measure of how much your investment has increased each year. This will be a percentage based on your initial investment minus the final value and then multiplying it by 100. This is also known as ROI.

Does investing require a lot of money?

Absolutely not! Traditionally investing has been seen as something only the rich can do. However, the reality of investing now is that it doesn’t require you to have a lot of money in order to start. At OpenMoney, we allow you to invest from as little as £1 which is perfect for beginner investors who are just looking to dip their toe in the water.

Another helpful thing to remember is that most, if not all, investment companies charge a fee on your investments. The common type of charges you’ll see are:

Platform or management charge - Companies often charge for using their services. These fees are normally deducted from your investments.

Annual charges - This is what you will pay to a company on a yearly basis for having them manage your investments for you.  

Fund charges - Fund providers can deduct payment from either the profit of your investments or by taking it directly from your initial investment in order to use their service.

When weighing up where you’re going to invest, make sure you understand the total charges you’ll face for each company. Fees can make a big impact on your overall portfolio value.

Figuring out how much you’re going to pay can often be confusing, especially if you’re a beginner. At OpenMoney, we understand how confusing it can be, that’s why we’ll tell you your total charges in pounds and pence! Our low total fees of no more than 0.76% annually mean that you’ll keep more of your money too.

Is my money at risk when investing?

Whenever you’re investing, there will always be an element of risk involved. The value of an investment can rise as well as fall so it’s important to understand that you may receive less money than what you had initially invested, this can be due to the market fluctuations and crashes.  

We always recommend investing money that you don’t need to pay your living expenses and essential outgoings and we recommend you have a cash savings buffer in case of any life emergencies. This way, there’s less need for you to access the money you’re investing should you need it. Investing for a longer period allows you to ride the ups and downs associated with investing.

Always keep in mind that with any investment that you take, there will always be an element of risk associated with it no matter what you may be investing in.

Where should I invest as a beginner?

As we mentioned earlier, there are several ways to start investing and there are always new and exciting ways people can invest! Getting to grips with all the different types of investing may seem daunting, so one question you must ask yourself is do you want to be an active or passive investor?

Active investing is where you build your own portfolio, for example this may mean buying your own stocks and equities in companies or investing in property. Active investing can take up a lot of time as you’ll always need to be aware of market fluctuations and have your finger on the pulse in order to buy and sell successfully.  

On the other hand, passive investors pay an investment manager to handle their investments for them. This method saves a lot of time and portfolios are pre-built meaning they are often diversified and can be matched to your risk appetite. Passive investing is a great option for those who can’t dedicate the time to researching investment strategies.

Once you have decided on the best strategy for you, there are a few more things you’ll need to consider such as how much you want to invest, how often you will invest and how much risk you want to take. These should all be determined by your financial goals.

How long should I invest for?

With investing, there isn’t a set time in which you should hold your investments for, however, we do recommend keeping them for at least 5 years to smooth out the ups and downs. The duration of your investment should be dictated by your financial goals. For example, if you wish to retire at 55 and you are 35, you need to invest for at least 20 years.  

As with all investments, you should only invest if you are committed to putting your money away for a few years knowing that there’s potential to either take a loss or make a gain. It’s important that you do not use any money which you may need in the immediate future such as your emergency cash savings.

What’s the best way to get started?

Once you’ve decided upon your investment goals and where you would like to invest, the best way to get started is to start! You may want to try out your chosen platform with a smaller amount so that you’re confident enough to invest more in the long-term.

At OpenMoney, we help beginners as well as experienced investors by simplifying the whole process. By taking our free financial health check you can find out whether investing now is a good move for you based on a few simple questions. If you are ready to invest, we’ll recommend the right investment products for you based on your goals, attitude to risk and the duration of your investment. Even if you aren’t yet ready to invest, we can set you on the right path by helping you manage and save your money.

Remember, capital is always at risk when investing.
Fees correct as of 31/08/2022 and may exceed the stated value.

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