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Investing in the stockmarket

Why invest in stocks and shares?

If you have some money to spare and want to save up for the future,one option you could think about is investing in the stockmarket.

You can make more money investing in the stockmarket than by saving in a bank or building society account, but it's also much riskier.

With a bank or building society account, you are guaranteed to get back at least the money you put in. If the bank or building society goes out of business, you are guaranteed to get back all the money you put in, up to a maximum limit of £85,000.

However, with stockmarket investments, it's possible to lose money as well as make it if the value of your stocks and shares goes down.

It's usually only worth thinking about investing in the stockmarket if you're willing to invest for a period of five years or more. This is because the longer you invest for, the more likely you are to make money on your investment.

Investing in stocks and shares also means that you won't be able to get at your money as easily as if you had saved it in a bank or building society account. You will need to think about whether you can get at money in other ways if you need to in an emergency.

What are stocks and shares?

Stocks and shares are bought and sold on the stockmarket. This is also called trading.

The most well-known stockmarket listing (or index) in the UK is the FTSE100 which lists the UK’s top 100 performing companies.

When you buyshares, the company takes your money and invests it. If the company does well, you both make some money. This is called a return. If the company does badly, you risk losing money. The value of your shares can also be affected by world economic and political events.

Investing in stocks and shares is a riskier way to save because it's possible to lose money rather than make it. But shares can go up quickly in value too. So the longer you invest for, the more likely you are to earn more money than if you had saved with a bank or building society. This is called giving you a higher return.

Ways to invest in the stockmarket

There are many ways to invest in the stockmarket. The most risky way can be to buy and sell shares directly. If the company you choose does badly, you may lose a lot of money.

However, you can reduce that risk by putting your money into a pooled investment fund. This spreads your money between shares and lots of safer investments to lower the risk of losing money if one of them does badly.

These safer investments are usually a mix of government-backed investments called gilts, cash, property and bonds.

Gilts and bonds are basically loans of money to a company or the government. They are considered to be safer than shares because you have more guarantees that you will get your money back. You will get paid interest too.

There are several different types of pooled investment funds which you can buy from different providers. From an investment company or a bank, you can buy:

  • unit trusts
  • open-ended investment companies (OEICS)
  • investment trusts.

From a life assurance company or a friendly society, you can buy a with-profits policy which includes:

  • investment bonds
  • savings endowments
  • friendly society savings plans.

Friendly societies have no shareholders, so all the members who belong to a friendly society share in the profits.

Although these investments are all pooled investments funds, they each have different features and work in different ways. This may make particular ones a better choice than others, depending on your investment needs and attitude to risk.

To find out more about the different types of investments and to compare products, go to the Savings and Investments section of the Money Advice Service website at: www.moneyadviceservice.org.uk.

The costs of investing

One of the main differences between putting your money in a savings account and investing it is that if you invest your money, you will have to pay charges.

The charges you pay depend on what kind of investment you take out.

If you buy and sell shares directly you will have to pay dealing charges.

With most pooled investment funds, you will usually have to pay an initial charge for setting up the investment. This could be up to 5 per cent of the amount of money you are starting the investment with.

If your investment is managed by a fund manager who makes decisions about what your fund is going to invest in, you may also have to pay an annual management charge.

The charges you pay for having an investment bond, savings endowment or friendly society savings plan policy can be quite high in the early years but they can go down the longer you hold the bond.

If you cash in an investment bond, savings endowment or friendly society savings plan in the early years, you may have to pay a penalty charge and you could end up with less money than you originally put in.

If you want to cash in your investment you may also have to pay an exit charge.

Charges can vary greatly between companies and it's important to be aware of them. But it is more important to make sure that your investment is doing well and making money for you.

If your investment is doing badly and you are paying high charges too, you should think about changing it.

Discount brokers

You can avoid paying high charges for your investments if you buy them from a discount broker.

Discount brokers don't offer advice on what investment you should choose.

It is really important that you have done your research and know which investment you want to buy before you choose to use a discount broker. For more details on how discount brokers work, go to the moneysavingexpert website at: www.moneysavingexpert.com/savings/isa-discounts.

If you are new to investing it may better to get some independent financial advice first. For more information about getting financial advice, see Further help.

Investments and tax

You usually have to pay tax on the income you earn from your investments.

However, You can put pooled investment funds into an investment Individual Savings Account (ISA) and  you will not have to pay any tax on the money you make from your investment.

From 1 July 2014 you can put up to £15,000 into an investment ISA. However, if you hold a cash ISA, the amount you can put into an investment ISA is reduced by the amount you have invested in the cash ISA.

For more information about ISAs, see Individual Savings Accounts.

What to check before you invest

There are lots of things to think about before you invest in the stockmarket.

You should think about the following questions:

  • what's your attitude to risk – are you willing to risk losing money in the short-term in the hope that you can get a higher return in the long-term?
  • how much money you could afford to lose?
  • are you willing to lock your money away for five years or more? It's usually only worth investing in the stockmarket over the long-term because the longer you invest for, the more likely you are to make money. However, if  you think you might need to get at your money sooner than that, investing in the stockmarket might not be for you
  • why are you investing? You could be investing to give you a lump sum in the future to pay for something like your child's university fees. If you're investing to get a lump sum, you need to look at investments that invest for growth. Or you could be investing to provide you with an income, for example, as a top-up for your retirement pension. Some investments are especially designed to provide an income so you should look out for these
  • are you happy to pay charges for someone to manage your investment? And are you happy for them to make decisions about where your fund is invested?
  • are you prepared to do the research so that you can make your own choices about what you invest in?
  • should you take financial advice before you decide which investment choices to make? You might want to do this if you're a first-time investor, have a lot of money to invest, or are finding it difficult to make investment choices.

If you decide to take out a stockmarket investment

If you decide to take out a stockmarket investment, remember those which promise high returns with no risk are almost certainly too good to be true. You should never invest more money than you can afford to lose.

Keep track of how your investment is doing, particularly as you get close to the time when you will need your money. It is always sensible to put it into a safer bank or building society account or move it into a less risky fund well before you need it, just in case the value of your investment falls suddenly and wipes out the profit you have made.

Further help

On Adviceguide

Independent financial advice

For help in finding an independent financial adviser, contact one of the following organisations:

Independent Financial Promotions (IFAP)

Website: www.unbiased.co.uk

Institute of Financial Planning (IFP)

E-mail: enquiries@financialplanning.org.uk
Website: www.financialplanning.org.uk

Personal Finance Society (PFS)

E-mail: customer.serv@thepfs.org
Website: www.findanadviser.org

The Money Advice Service

The Money Advice Service is a free, independent service. Their website has lots of useful information about financial products, including comparison tables. Go to: www.moneyadviceservice.org.uk.

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