Are you frustrated by the pitiful returns you get on your savings account? If you are, it may be time for you to make your first foray into investing in the stock market.
- The Stock Market Isn’t Only for High Rollers
You don’t need to be as rich as Warren Buffet to invest in the stock market. In fact, you can get started with an investment fund for as little as a £50 monthly deposit or a lump sum of £500 or £1,000. While you don’t need to have a lot of money to invest, you have to make sure you can stomach watching your savings drop in value, as well as you can watch it rise.
Your investment is a long-term game, so you should be prepared to have the money to invest locked away for a minimum of 5 years. Ideally, you should plan to have your money invested for a decade or more. Therefore, investing in the stock market is best for long-term financial goals, such as retirement and your child’s education. This would not be the best type of investment for a new car or a house deposit.
- Beware of Reckless Caution
It can be nerve-wracking to basically gamble away your money on an unpredictable market. However, history shows that when it comes to long-term investing, equities outperform traditional cash savings. This is not surprising to anyone when you consider the pitiful returns offered by building societies and banks in a traditional savings account.
According to the financial website Moneyfacts, the average cash Isa on pays 1.59 percent. That’s less than the current 1.6 percent rate of inflation. That means the majority of people saving their money in banks are actually losing money in terms of their accounts real value.
- Investing Has a Tax Advantage
If you invest your money through a stocks or shares Isa, you will be entitled to an annual tax-free allowance of up to £11,800 this year. As of 1 July, this allowance will increase to £15,000.
The income and interest paid on investments you make through an Isa do not require payment of capital gains tax. Instead, you pay a 10 percent flat rate on any dividend. This can be a great benefit for a taxpayer who might otherwise have to pay the higher rate of 32.5 percent.
- Think About What You Want To Invest In
Many people believe that cash is the least volatile asset class. Unless the building society or bank goes bust, your money is safe. However, as mentioned before, the buying power of the money you’re saving can be disintegrated by inflation. So while your money is safe, in real terms you may be losing money. Fixed interest investments are loans to governments (in the form of gilt or government bonds) or companies (in the form of corporate bonds). These investments can provide a reliable, but modest return and are regarded as a lower risk investment when compared to equities.
However, the risk profile is changing for these investments. When interest rates rise, their prices could fall and the risk of losing capital increases. For example look at the SCG share price over the last while.
Equities, also known as shares, offer a stake in a company. When a company does well, shares tend to rise. When a company is failing, the shares fall.
In addition to investing in companies, you can also invest in commercial or residential property or commodities such as oil or steel.
- Don’t Put All Your Eggs in One Basket
If you put all of your hard-earned savings into shares in one company, and that company fails, then you lose everything. You need to ‘diversify’, which means dividing up the funds in your portfolio and investing portions into various companies, global markets, and asset classes.
Some markets will fall and others will rise. This can balance out your portfolio. The wins will cancel out the losses. The way you spread your money out will be determined by the level of risk you are willing to accept. A cautious investor would not have too much of their portfolio in equities.