A beginner’s guide to investing

What is investing?

Investing is the act of buying assets, like shares, with the hope that they’ll be worth more at some point in the future. If the value does rise, you can sell your assets for a profit. Investing is also a way to potentially protect your wealth from the damaging effects of inflation.

Besides making money from selling, you could enjoy other forms of income as an investor. If you invest in company shares, you might receive dividends; and if you invest in property, you’ll likely collect rent.

While investing may sound like a good idea, it’s important to note that all investing incurs risk; and if you’re a beginner, even more so. You could get back less than you put in, which is why it’s critical to manage your risk effectively.

Investing vs saving

Investing and saving are not the same. When you save money, you incur very little risk that it’ll be lost by your bank, if they’re established and reputable. When you invest, however, you take on the possibility of loss in the expectation of earning returns that compensate you for assuming this risk.

Saving isn’t risk-free, though. If the interest you receive doesn’t equal inflation, the buying power of your deposit will decrease over time. For example, a non-interest earning deposit of £1000 will, in 10 years, only be worth £820 in today’s money if inflation is at a modest 2%. That’s a loss of 18%.

Let’s look at two more examples of how investing could work. Note that all examples are purely hypothetical. Past performance of any type of investment doesn’t guarantee future results.

Types of investment products

You can choose between several types of financial investments. Each product offers a different set of features, and your choice will be based on your individual needs or preferences. Investment products include:

1. Stocks
2. Funds
3. ETFs
4. Managed portfolios

1. Stocks

When a company is listed on an exchange (eg, Coca-Cola, Barclays or Tesla), its shares become available to the public. This means that you have the opportunity to buy and own shares of a stock.

Often, people want to invest in brands that have a strong performance history. This is because their value is expected to rise, in which case shares can be sold for a profit. Some stocks also pay dividends and offer shareholder voting rights.

Individual share prices will fluctuate according to a variety of market forces – making stocks rather volatile. For this reason, many investors prefer ETFs. Always take care to manage your risk, regardless of the instrument.

2. Funds

Funds pool the money of investors together and use it to buy a selection of securities. These assets could appreciate, and the fund’s value would then also increase. While funds can be structured differently, they all work on the principle that as the fund grows, each share grows in value, too.

Some funds can only be bought directly from the fund provider in an ‘over-the-counter’ (OTC) transaction. Others, like exchange traded funds (ETFs), are traded on an exchange and can be bought and sold like company stock.

Funds can also be actively or passively managed. Passive funds attempt to track an index, like the FTSE 100, buying and selling stocks that mimic the index. Actively managed funds look to outperform the market, but generally incur higher costs.

Note that we only offer on-exchange funds.

3. ETFs

As touched on above, ETFs track the performance of a basket of underlying assets – like stocks, currencies, or even sectors. This means you can get wider market exposure in one position.

An ETF’s price is determined by the value of its underlying assets, known as the net asset value (NAV). This is calculated as the ETF asset value minus the ETF liability value, divided by the number of shares in circulation.

4. Managed portfolios

Managed portfolios are a set of diversified investments, tailored to your needs and handled by a portfolio manager. If you’re looking for this type of investment exposure, you can get customised and expertly managed portfolios in the form of our Smart Portfolios.

You can get started with just £500, and there’s no initial setup (or exit) fee. We cater to five distinct risk profiles, so you can invest smarter. Whether you’re an aggressive or conservative investor, you can find a Smart Portfolio that suits you.

Lower-risk investments include bonds and ETFs, while higher risk investment typically include stock-based holdings.

Investment risk and diversification

Investment risk is the chance that you’ll get back less capital than you initially put in. This could happen for several reasons, including:

• Poor market performance due to a downturn in the economy
• Below par company performance due to a nosedive in an industry, or bad management
• Loss of confidence in the future earning potential of a company or industry
• Better investment opportunities elsewhere, lessening demand for a stock
• A significant change to an exchange rate, affecting the home-currency value of offshore investments
• Geopolitical events like trade wars

You can mitigate some investment risk through diversification. This is spreading your capital between a range of stocks that operate in different market segments, or across different asset types. A loss in value to one stock, for example, could have a less severe impact if your other stocks aren’t subject to the same risks.

Similarly, the loss to your capital amount may be lessened in a stock market slump if you hold bonds. Having too many eggs in one basket is known as ‘concentration risk’. Funds are a good way to diversify your holdings, which is why ETFs and Smart Portfolios are popular products for new investors.

The role of a broker

Stock exchanges are highly regulated, so only accredited entities can place deals on them. Investors have to place their order with their brokerage, who’ll then execute the deal on the exchange. Some brokers offer advisory services, but many, like us, are execution only. All brokers charge fees for their services.

Things to consider before investing

Before you open a share dealing account to start investing, make sure you understand the following:

How to start investing

1. Understand how the stock market works
2. Define your objectives and risk tolerance
3. Decide whether buy shares yourself or invest in a managed portfolio
4. Identify a broker that you trust and offers low transaction fees
5. Open an investment account

1. Understand how the stock market works

The first step to becoming an investor is to learn how the stock market works. The stock market is the marketplace where shares are bought and sold, between companies and the public.

You can also access free online courses on IG Academy, or read our comprehensive stock market guide.

2. Define your objectives and risk tolerance

Consider why you want to invest, as well as your appetite for risk. Make sure your objectives align with your risk tolerance – as your outcomes are likely to depend on the level or risk you’re prepared to take on.

Read more about investment aims and risk tolerance

3. Decide whether buy shares yourself or invest in a managed portfolio

If you want to choose and invest in shares yourself, you can do so using our share dealing platform. You can choose from 13,000+ international shares. Alternatively, you can apply for a Smart Portfolio and have one of our experts manage your investment on your behalf.

4. Identify a broker that you trust and offers low transaction fees

We’ve been in business since 1974, and we’ve been at the forefront of the industry ever since. When you choose us, you’re choosing one of the world’s leading providers.¹

When it comes to investment costs, every expense can eat into your returns, so it’s important to choose a broker that offers competitive commissions and transaction fees. With us, you can buy US shares from zero commission and UK shares from just £3 commission.² If you choose of our managed portfolios, there’s no cost to open or exit your positions.

5. Open an investment account

Once you’re ready to start investing, you can open an account. First, fill out an application form. We’ll verify your identity within a few minutes. If your application is successful, you can add funds to your account and get started.