Guide to Investing
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There are almost as many ways to invest as there are Instagram posts about it (1.4 million for #makemoney when we last checked). So, to make it simpler, we’re introducing you to the most popular ways...
In this guide:
Ways to Invest
#1 Lend your money
The government wants your cash. No, not in the form of more taxes but as bonds. Same goes for certain companies. If you buy a bond, you're lending the government, or the company your hard earned cash. What’s in it for you? They pay you interest for using your money. If you want to know more about bonds, we have a guide for this. You may also find saving bonds at your bank. This means you deposit money with them for a fixed amount of time and they pay you interest in return (not a bad deal right?).
I’m not into bonds…
Another way to lend money is to share it with individuals using a peer-to-peer platform. If that sounds strange, it’s because it’s a fairly new concept in the UK. How it works is through an online platform that connects lenders with people or companies that need loans. The bonus is that you’ll get paid more interest than your bank’s saving account. The catch? You’re taking a slightly higher risk. Unlike stashing your savings in a bank, your money is not insured. But, many of these peer-to-peer platforms have a provision fund to cover any shortfalls in loan repayments. Phew.
#2 Buy some shares
If you do this you’ll own a part of a company. A teeny, tiny part, but a part nonetheless and how cool is that? Very! Especially if you consider that when the company profits so do you since you share a sliver of it (and we really mean a sliver!). It’s also good news for you if the company’s value increases because, hey presto, the value of your share increases too. The risk is that it all goes to pot and the company under-performs and its value falls.
Where do I sign up?
You’ll need to open a share dealing account with your bank or a broker. That’s the traditional way of buying shares. Most now offer online accounts. You can select the company you're interested in and decide how many shares you want to buy. We have a guide for this.
But first, highlight, screen grab, take a mental note of this point, it’s THAT important: One of the rules of investing is to diversify. So, rather than piling all your money into one company or one industry, spread it around and build up investments across different sectors, companies and even countries.
#3 Buy into a fund
You can invest in a fund if the above is too big a job for you. A fund uses money pooled together from hundreds or thousands of people to invest in lots of different things. You can buy into them through your bank or an online broker. You’ll get to see what’s in the fund before you invest. We have a guide for this.
Different investments make money in different ways. Here’s the lowdown…
Interest From Lending
You lend your money to a bank, company or government and as a thank you they pay you interest. The longer they keep your money (this is called the term of the loan), the higher the interest you’ll get. Ditto if the organisation you’re lending to is considered “riskier”.
Buying & Selling
You buy something and it goes up in value without you having to do anything. Cha-ching! Right? Think: property, diamonds, gold, shares of a company - you get the point. The difference between what you originally spent and the price you sell at is your profit, aka a capital gain. This is known as value investing.
You buy a portion of a company and as they make a profit you get some of that profit too. So, say you invest into a new start-up company you’ll be rewarded down the line when they’re successful. Or, if you invest in a huge corporation, like Apple or Google, they’ll give some of their quarterly profits to their shareholders. The profit paid out to those shareholders is called dividends. This type of investment is known as dividend investing.
You know all about taking risks. That blind date you agreed to, saying no to mobile phone insurance, leaving your London flat without an umbrella in your bag… But when it comes to investing it’s about the potential to lose money. BIG RED FLAG HERE: Risk varies hugely across different investments.
So what’s the safest investment I can make?
Lending money, hands down. This is the least risky because it comes with a promise that your full investment is returned at the end of the term and you often get a fixed rate of interest paid out to you too. There are still some risks though. If you need the money back sooner than you’ve agreed chances are you’ll take a hit or the organisation you’ve lent to could go bust. If this worst case scenario happens there’s still a silver lining because lenders are paid back ahead of shareholders (aka the people that own the company). Enough said.
Sometimes I do like to gamble…
Buy commodities (the traders term for gold, oil, coffee, etc … ). It’s the riskiest way to invest because the prices of these items are volatile. Ahem, that means you can make a lot of money but you can loose a lot too.
Is there anything in between?
Buying shares (translation: a portion of a company) may be safer than commodities but riskier than lending money because the value of your investment can change over time. However, your potential to earn more is higher.
MOXI’s Rules of Risk
In the world of finance, it’s the norm that higher rewards come with higher risk. Similar to life in general. So, if you lend money to a company that is not as financially healthy as others in its sector you'll receive more interest. And, if you buy shares of a volatile company (we explained this term above) you’re set to gain or loose more.
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