Investing: Stocks and Shares ISAs, funds, risks, buy-to-let, peer-to-peer and more explained
Our full guide to finding a platform, managing your investments, minimising tax and staying safe.
Having some money set aside which you can call on in the future, whether that’s for home improvements, a big holiday, or simply to support your finances if your circumstances change is a good idea.
The problem is that it’s been awfully difficult to get any sort of return on the money set aside in traditional savings accounts for a long time as a result of the tiny base rate.
However, there is the potential to secure a better return on your money by investing it. Investing can come in all sorts of different forms, from purchasing stocks and shares in well-known ‒ and less well-known ‒ businesses to investing in gold or even buy-to-let property.
And while the returns can dwarf what you’d get from a savings account, the risks are far greater too. Make the wrong decision and you can end up with less than you started with, potentially losing every penny.
That’s why it’s generally a good idea to start investing once you already have some sort of rainy day fund in place, which you can turn to in an emergency.
So where do you start with investing?
What does my portfolio look like?
There are a couple of factors that need to be considered from the outset.
The first is what asset you want to invest in. There are many different options here, from shares in a business to currency and even property. Different assets will hold more appeal for different investors, depending on how hands on they want to be and what sort of timescale they are looking at with their investment strategy.
The next is how you invest. You may want to hold your investments through some form of ISA ‒ there are dedicated Stocks & Shares ISAs and Innovative Finance ISAs for example ‒ which mean that you do not have to pay tax on the returns from that investment.
But how are you going to buy those stocks and shares, for example? There are now all sorts of investment platforms which are worth a look, which not only offer access to a range of different assets but also have all sorts of different fee structures. Fees matter – a few percentage points can mean thousands of pounds over time.
Many platforms let you pick your own stocks and funds to invest in. There are now also ‘robo-advice’ platforms that can build you a personalised investment portfolio. As the name suggests, based on a few questions about you and your attitude to risk, the platform works out the right sort of investment portfolio for you. Saves reading the FT, right?
It’s also possible to invest ethically, with platforms that can build you a personalised ethical portfolio, whether you want to fight climate change, promote gender equality or good governance.
Confused? Then maybe you should consider getting financial advice – here’s what to expect.
Managing stocks and shares
Perhaps the first place that many people start with investing is by going for some stocks and shares. These essentially give you a stake in the business you are investing in.
There are a couple of main ways to benefit from this sort of investment. The first is that the value of the stocks can increase over time if the business performs well. However, some firms also pay dividends to their investors, which is basically when they share a slice of their profits with their investors in the form of regular payments.
You can pick the individual stocks and shares you want to invest in, or you can invest through funds, which are collections of stocks and shares. These can be managed ‒ where a fund manager makes those decisions based on their research on individual businesses ‒ or passive, which is where they follow an investment index like the FTSE 100.
You should think carefully about making your investments, because most experts recommend you don’t tinker with them.
With 24/7 news coverage and smartphone investment apps it can be tempting to chop and change investments, but that’s not always the best strategy.
If you want to better invest, start by understanding how risky your investments are.
It also helps to understand stock tips and what labels like ‘add’ and ‘underweight’ actually mean.
One form of investment that’s become more prevalent in recent years is peer-to-peer investment.
Peer-to-peer platforms act as a middleman, allowing you to fund loans to borrowers. Some platforms work with individual borrowers, with the money you invest split across a host of different borrowers in order to reduce the level of risk involved. These borrowers might be looking for funds to pay for a new kitchen, a new car or some home improvements, for example.
Alternatively other platforms allow you to fund loans to all sorts of different small businesses. They might need the cash to help finance their growth plans for example.
The returns paid through different platforms can vary significantly, and are influenced in large part by the risk involved.
If you are lending to individual borrowers with excellent credit records then your investment may be a little more secure, but the interest rate paid may be less impressive. By contrast if you’re lending to a small, start-up business then the risk involved may mean you enjoy a higher return, should everything go to plan.
While all investments have some level of risk involved, many peer-to-peer platforms have attempted to counter this by setting up reserve funds which can be used to top up returns should borrowers fall behind with their repayments.
It’s definitely worth doing your research on what measures are in place to protect an investor should the borrower fall behind, as well as what would happen to your money in the event that the peer-to-peer platform went bust.
It is also worth recognising that it is not always easy to get out of a peer-to-peer investment early. In some cases you may need to find another investor to purchase your stake.
The Government launched the Innovative Finance ISA (IFISA) a few years back which allow investors to enjoy tax-free profits on their investments through peer-to-peer platforms. Making use of this tax-free wrapper means that you can enjoy an even better return from successful investments.
Investing in gold
Gold is considered something of a safe haven for investors, an asset that people often turn to when the global situation gets a little more complicated, such as during the financial crash or the Covid-19 pandemic.
There are a few different methods for investing in gold. You could purchase physical gold bars or coins for example, though you’ll also have to factor in the costs of storage ‒ you can’t really leave them under the bed. Alternatively you could opt for an exchange traded commodity, which is rather like investing in a gold fund.
There are pros and cons to the various different ways to invest in gold, so it’s worth ensuring you understand them before you splash out on bullion.
One form of investment that has come under greater focus in the last few years are cryptocurrencies.
Cryptocurrencies are a form of digital currency, and can be used in some cases to purchase real-world goods (and not just through the ‘dark web’), traded or retained as an investment. The most high-profile is Bitcoin, but there are now all sorts of rivals including the likes of Ethereum, Litecoin and Ripple.
There have been huge amounts of hype around cryptocurrencies as a possible investment option, particularly whenever the price of Bitcoin rockets ‒ as it tends to do every now and again.
Simon Peters, cryptoasset analyst at multi-asset investment platform eToro argues that all investing ‒ including crypto ‒ does not need to be a case of timing the market, but can reward a patient approach.
He adds: “Bitcoin, for instance, is increasingly recognised as a hedge against inflation with similar properties to gold on account of its finite supply. It is also worth remembering that crypto, and the blockchain technology underpinning it, is still an emerging technology in the early stage of its development. Investors have the opportunity to capitalise upon a new and evolving trend, which could lead to considerable returns in the future.”
But there’s no escaping the fact that it is an incredibly volatile asset, there is little transparency around exactly what drives these price jumps and falls, and that there is the potential for any cryptocurrency investment to spectacularly wrong.
As a result, it’s not really something you should think about unless you have the money to lose and you’re confident you know what you’re doing.
Peters adds: “The downside of cryptoassets is undoubtedly their volatility… prices can fall as quickly as they rise and investors could be stung in the short term. All investing carries risk, which is why having a long-term outlook and diversifying your portfolio will help you ride out market volatility.”
You may feel more comfortable investing in the solid asset of bricks and mortar by becoming a landlord.
Buy-to-let has been a popular ‒ and lucrative option for all sorts of different investors over the last couple of decades, though it’s worth acknowledging that a host of changes to the way the market operates have made it a little tougher for investors.
For example, purchasing second properties now attracts a 3% additional Stamp Duty rate. There are also a host of widespread myths surrounding investing in property that need to be avoided.
There’s lots to think about when investing in property, from the type of property that you go for to the way that the ownership is organised legally. For example, while you can opt to invest in a standard property, you could attempt to cash in on the higher yields available from dividing a property into a ‘house of multiple occupancy’.
Similarly, you can invest in your own name, or own your portfolio through a limited company.
Rob Bence, the presenter of the Property Podcast, has put together a Buy-to-let Masterclass series of articles.
There is an alternative to directly investing in the property though, allowing you to enjoy returns from bricks and mortar without becoming a landlord yourself, through, through peer-to-peer mortgage lending platforms.
Effectively you can invest in the loans offered to property investors and enjoy returns that way, removing some of the workload that comes from life as a landlord.
Some investors look into more exotic assets when it comes to investing. These could include things like wine, whisky, art and jewellery.
These sorts of assets can seem fun and exciting as investments ‒ a bottle of wine is a more thrilling investment than a stock in a company, for example, although not necessarily a great money maker.
But the reality is that these are incredibly risky assets to put your money into unless you really know what you’re doing, and simply aren’t going to be appropriate for the vast majority of individual investors.
CFD stands for contract for difference, and is what’s known as a financial derivative. These are a form of investment which can provide you with the chance to make money from a specific stock rising ‒ or falling ‒ in value, without you ever having to actually own that stock.
By investing in a CFD you are effectively betting on what a stock may be worth at the end of the contract. This is where the phrases ‘selling short’ or ‘going long’ on stocks come from. If you are ‘shorting’ a stock it means you think it will fall in price, while going long means you are backing it to rise.
While there is the potential to make serious money from investing in CFDs, it can also go horribly wrong leaving you seriously out of pocket. As a result it’s not something for many investors to even consider.
Investing and tax
There are a few different taxation elements to bear in mind when it comes to investing.
For example you may need to pay Capital Gains Tax on the profits made when selling your assets. Thankfully there is a generous annual allowance to consider here, which currently sits at £12,300, though it’s an area the Government appears to be looking at closely.
There is also a Dividend Tax which, as the name suggests, is a tax paid on any dividends you receive from your investments. There is a £2,000 annual dividend allowance, but after that you’ll be taxed at between 7.5% and 38.1% depending on your Income Tax band.
You may also need to pay Stamp Duty when buying shares, as well as investing in property.
Because of these various taxation elements it’s well worth making the most of those annual allowances, and keeping as much of your portfolio within an ISA wrapper as you can.
Investing for retirement
For many people their main experience with investing will be their pension.
You can go with the hands-off approach here, leaving it to those in charge of your pension fund to make the decisions over precisely how the cash you save each month is invested.
Or you can take a more proactive role by saving in a self-invested personal pension (SIPP). This is where you choose where your money is invested, and while it was once the near-exclusive preserve of high-net worth savers, there are now plenty of low-cost SIPPs around, giving far more people control over how their pension is managed from the outset.
Easy income strategies
You don’t need to start with savings to make money: you can also make money from your possessions.
We’ve got a guide to renting out every part of your property, even your attic, garage and driveway!
Sadly, investing attracts a range of crooks, from ‘get rich quick’ schemes offering unrealistic returns through to criminals who simply take your money and vanish.
A healthy dose of scepticism will help you keep safe, as does checking a company is FCA-regulated. The FCA’s ScamSmart website can show you if a company has been in trouble before or if an investment is highly risky.
Even experienced investors have been hit by scams, so stay vigilant.
Are you a first-time or experienced investor? Is there anything we haven't explained, or do you have any tips to share? Please give us your feedback in the comments below.
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