To put it simply, investing is the act of buying assets, with the expectation that they’ll increase in value over time. For example, when you buy a portion of a company, you’re buying a ‘share’. Your investment can then go up or down in value depending on the amount of growth that company makes. You could get back less than you invested if that company makes a loss. You can invest in all kinds of things such as property, government bonds and even gold. You can buy shares in the financial markets, a place where people buy and sell investments.
The rise in the share price is the capital return investors get from investing in the shares of a company. Income and dividends are a source of return and are paid by companies to investors.
The FTSE 100 Index® contains the biggest 100 UK companies you can invest in and is known as being home to many big dividend-paying companies.
As with many things in life, the less risk you take, the smaller your potential reward. Savings are where most people start; putting any spare cash to one side to build up a short-term safety fund in case of emergency. The rate of interest paid on money held in deposit accounts tends to be relatively low but the amount of cash you have shouldn’t fall in value.
Investments are long term savings, five years or more, where different amounts of risk can be taken. Investing is about putting money away either as a lump sum or regularly, providing the opportunity for your money to grow in value over the long term.
There is a wide choice of investment types each with their own pros and cons. For example, investing in riskier investments, such as the shares of companies in less developed markets because of factors such as political risk, means that there could be more bumps along the way, although there is more potential for higher returns. Charges might also apply to investments. Remember the value of investments can go down as well as up and you may get back less then was invested.
You can manage risk to help your money work harder. For example, put your money into lots of different investments and you’ll ‘spread’ or ‘diversify’ your risk. Just like not putting all your eggs into one basket, you won’t have all your money invested in one company that could suddenly fall in value. You can also invest little and often to help smooth out the zigs and zags of the market.
Another good way to manage your risk is to invest for long-term goals instead of short-term ones. For instance, invest for a goal at least five years from now. That could be anything from a house deposit, university fees for children or simply to grow your own pension pot. If your investment drops in value in the short term, you’ll be less likely to panic sell before it has a chance to go up in value again.
To sum up, risk may sound scary at first. But it’s the reason you could get a higher return on your money to begin with. When you see it that way, risk is a good thing, so long as it’s carefully managed.
At times of uncertainty, it’s understandable to have a sense of worry. But when it comes to investing, it’s helpful to not let worry become panic. Investment decisions made under stress are rarely good ones. It’s wise to not let short-term volatility dictate long-term investment decisions.
And finally, it’s often sensible to seek help. Unless you’re an experienced investor, you may choose to leave investment decisions to someone else. Lane Financial Management Ltd can help build a suitable investment strategy that marries with your financial objectives and tolerance for risk.