Investing can come in many different forms, from traditional methods like stocks and shares, to more modern innovations like peer-to-peer and crowdfunding.
However, no matter what you are investing in, there are certain fundamental questions that you need to ask before agreeing to commit your cash.
New to investing? Read our beginner's guide
Is the investment regulated?
Not all investments are regulated by the Financial Conduct Authority. Unregulated investment schemes include things like land banking or investing in precious metals.
Regulated firms are forced to follow certain rules that ensure that customers are treated fairly and provided with enough information to make an informed decision. This isn’t the case with unregulated investments, so investing with an unregulated firm is a gamble.
It’s worth bearing in mind that just because an investment is regulated, that doesn’t mean it is low risk – there are plenty of risky investments that are overseen by the regulator.
How risky is it?
On that subject, it’s important that you understand just how risky the investment is.
All investments are risky in the sense that your money is never completely safe in the way that it is with a traditional savings account from a high street bank.
Investments that come with a higher level of risk tend to provide higher returns, but equally, you are more likely to lose money.
How ‘liquid’ is an investment?
Unfortunately, the investment industry loves a bit of opaque jargon, and whether an investment is ‘liquid’ or not is a perfect example of that.
Essentially, the issue here is how quickly you can sell the investment and get your money back.
If you invest in a stock or a fund, then there’s a relatively quick turnaround between deciding to sell up and getting the money for doing so.
However, if you invest in property, then this is classed as an illiquid investment.
You might decide that you want to sell up, but it can then take months – or even longer – in order to find a buyer and complete on the transaction.
While the term ‘liquid’ is not particularly helpful, it’s nonetheless something you need to consider carefully before any investment.
A very famous example is the freezing of Woodford's famous fund, which left many thousands of investors unable to access their cash due to a lack of liquidity in the fund's underlying investments.
If you want to be able to sell up and get your hands on your money swiftly, then going for an illiquid investment is not the best move.
Can I keep my investment within an ISA?
ISA may stand for Individual Savings Account, but you aren’t limited to keeping cash within the tax-free wrappers offered by this form of account – some investments can be kept within an ISA too.
For example, if you want to invest in the stock market, you can do so with a stocks & shares ISA and enjoy returns from your investments without the taxman taking a cut.
If you’re planning to invest in the alternative market, such as through a peer-to-peer website, then you may be able to place that investment within an Innovative Finance ISA too.
In the current tax year, you can put up to £20,000 in an ISA.
You can split that however you like across the various types of ISA – if you choose to, you could put all of it in investments rather than cash.
What fees am I going to have to pay?
Depending on the investment, there may be ongoing fees to account for, as well as the initial cost of the investment itself.
For example, if you invest in a fund – which collects together shares - then there will be an annual charge to pay.
These fees can vary significantly – you may end up buying essentially identical funds from two different providers, but pay very different fees for doing so.
As large fees can erode the overall return from your investment, it’s therefore crucial that you understand from the outset what you’ll be paying.
Read more: how investment fees and charges really work
Does this investment help me diversify?
A crucial way to reduce the risk of losing money is to have a diversified portfolio of investments.
That means investing across different types of businesses, regions of the world and even asset classes.
If you are investing in a single share, then there is no obvious diversification – if that firm hits trouble, you’re going to lose money.
By contrast, if you invest in a fund that tracks the FTSE 100, then it has diversification built into it – while some firms in the FTSE 100 may suffer issues, this will be balanced out by other firms in the index.
That said, investing in a single share can bring an element of diversification, depending on where else you have invested.
For example, if you have invested in 10 shares across the banking and pharmaceutical sectors, then investing in a tech firm will add some diversity to your portfolio.
Investment risk warning: share values can go up as well as down and you could lose some or all of your money. Consider speaking to a financial advisor before making any investment decisions.
