What is investing?
We’ve put together this short guide for anyone who is new to investing. It aims to help you answer two questions. What is investing? And why might you choose to do it?
Let’s start by thinking about money
If you have money, you can keep it to one side until you need it. Or you can buy something with it. And in the financial world, that’s the basic difference between saving and investing.
Opening a savings account at a bank or building society is a way of putting your money to one side until you need it. Investing is about using your money with the aim of benefiting from the future potential of something you buy.
Getting the general idea of investing
One simple way to think of it is like going to a car boot sale, and spotting an item you believe is good quality for the price and might be worth more in the future. You buy it, take it home and admire it for a while. Later, you put it up for sale for more than you spent on it. You’re hoping to make a profit.
If no-one else sees how good your item is at that time, you might end up stuck with it for longer than you’d hoped - until you’re able to sell it for a profit later. Or if you have to sell it right away and can’t wait, you might have to sell it for less than you spent – losing some money as a result.
But if others believe in your item too, the chances are you’ll find a buyer when you want to and end up with more money than you had before.
You took a calculated risk in the hope of making a profit. You understood there was a chance you could lose some of your money on your item and decided to take that chance anyway, because without taking it you wouldn’t have had the same opportunity to grow your money over time. And that’s really what investing is all about.
Why take a calculated risk with your money?
Why take even a calculated risk though? Putting money to one side in a savings account does mean you know it will be there when you want it. But the prices of things you might spend it on – like holidays or a car – don’t tend to stay the same. They tend to go up over time. This means your money might end up buying less in the future than it does now.
So unless you can be sure your bank or building society account pays you interest at a rate that’s going to keep up with rising prices, you’re still taking some risk. And you’re not giving yourself any chance of making a decent profit over time. Which all adds up to saving and investing both involving risk.
With savings the risk is that your money might not keep up with rising prices. With investments the risk is that their value can go down as well as up and you might get back less than you put in. But you do have more potential to make a profit over the longer-term, which is why – although you can choose to sell investments at any time - it’s usually a good idea to plan on holding them for five years or more.
A quick recap
Let's get back to our questions from the start now, and recap.
What is investing?
It’s buying something with your money, aiming to benefit from its future potential.
Why might you choose to invest?
Because it gives you more potential than savings to make a profit over time.
You can get started by investing from a savings pot you’ve already built up or by just putting in what you can afford on a regular basis. And the earlier you do, the greater the chance you have of building up a considerable sum. Never forget though, there are risks. And depending on your circumstances there might also be other things you’d be better doing with your money right now.
So, if you’re still interested in the idea of investing it’s time to ask – am I ready to invest?