What is investing?
Overview of What Is Investing?
So, what is investing? Investing is whereby you set certain amounts of money aside today in order to bring you more money at some point in the future. Clearly there is a lot more to it than that, but in a nutshell, it can be coined as either taking some jam today or by investing it for more jam tomorrow.
Or to look at it another way, you could spend £1,000 today, or invest it and have that same £1,000 be worth maybe £2,000 in 5 to 10 years’ time, subject to market returns of course.
Investing can be defined as committing money or capital to an asset or activity with the hope or expectation of obtaining an additional income or profit at some point in the future. This really is the quick answer to “What is Investing”.
It should also be noted right up front, that investing also comes with the risk of losses. Remember the often-quoted technical phrase, stocks can go down as well as up and you may not get all your money back! That is a key takeaway from this what is investing beginners guide.
Investing via the stock market is usually the most common way for beginners to gain their first investment experience.
What is Investing - Are you really made for investing?
It is really important to consider at the outset of your investment journey if you really are made for investing. By this we mean are you able to cope with the mental and psychological stress and pressures that come with investing in assets that can both rise in value and fall in value, as often happens with stock market investments.
If you are the type of person who would not be able to sleep at night thinking about a slight loss with their investments or waking up in the middle of the night in a cold sweat because the market has dropped a few percent, then investing is probably not for you. If you have this very cautious outlook with money, then you should put your cash into a savings account and not venture into the world of investing now you know the risks of what is investing.
However, if you are the type of person that understands the potential ups and downs of the stock market, and you feel you would not be unduly concerned with the occasional market crashes and drops in your equities value of anywhere between 10% - 20% or even 50% on occasions, then investing maybe a good long-term approach for growing your wealth.
What is Investing - What assets can you invest in?
There are many different types of asset class you can invest in, but we will just concentrate on 4 main classes for this what is investing guide.
What is investing in Stocks and shares
Otherwise known as equities are partial ownership of listed companies and businesses on any main stock market in the world. When people buy stocks and shares, they are buying fractional ownership of these businesses and therefore are entitled to the proportionate fractional ownership benefits, either by way of capital increases in value when the share price goes up, and also any distribution of profits by way of dividend distributions, which can be paid twice a year or on occasions four times a year.
It should also be noted that being an owner of a business also means you share in the downside, and so if the share price reduces due to poor performance, then your investment in that business will fall meaning a capital loss to your portfolio.
What is investing in Bonds
Also known as corporate bonds, government bonds, or high yield bonds, are another form of investment, but they behave in a different way to stocks and shares investments noted above. A bond is simply an I owe you issued by either a government or a corporate entity.
When you buy a corporate bond you are entitled to a return on your investment known as a coupon or interest rate in plain English, and if that interest rate is for example 5%, then you will get a 5% return on your investment either once or twice per year, depending on how the bond is structured.
Although corporate bonds are usually classed as safer than stocks and shares and equities, you should also be aware that you can lose your capital on bond investments, either by the company invested in going bust, or they may get into difficulty and not be able to pay the full bond back or the full coupon payment, therefore meaning you will either miss out on your dividend payment, or some of your capital returned or occasionally both.
You must also be aware that bonds trade at above or below par value, par usually being a price of 100, and when bonds are in demand, they trade at a price of above 100, and vice versa when bonds are under stress they trade at a discount to par value ie below 100. The importance of this is that if you buy a bond above par say 110 pence and hold it to the bonds maturity date at some point in the future, then the bond will only pay back 100 at maturity, and so there is a guaranteed 10% reduction in your capital if you did hold this bond to maturity. So you must be careful with buying bonds above their par value.
What is investing in Property
Also another common investment, and whilst you most likely won’t buy a full sized house, you may buy shares in property funds that aim to pay an income or yield based on the fund’s holdings, such as large landlord rental units for either office blocks, shopping centres, or retail parks. This type of property investment can be a good diversification from the standard stocks and shares investments, and a small holding in property is usually recommended in most people’s portfolios.
What is investing in Commodities
Such as gold, silver, platinum, oil, natural gas, energy, or even lean hogs, can all be traded and used as investments. Commodity investing is considered to be much higher risk than both bonds property and standard stocks and shares investing, and so only a small proportion of a beginner’s investment should be allocated to commodities, and those commodities should usually be fairly mainstream such as precious metals and oil perhaps.
What is investing - How can you invest?
Now you are able to answer the question what is investing, we also need to consider how you can invest?
The main way of investing in the 21st century is via either online brokers for trading, or more commonly online platforms which act as both information hubs and broking facilities. The main online platforms in the UK are the likes of Hargreaves Lansdown, fidelity, CJ bell, vanguard, and Interactive Investor. They all have different prices and slightly different functionality, but their aim is the same and that is to provide a one stop shop for retail investors like you and I to be able to get information, review key fact documents on stocks shares and funds, and then to be able to transact the buy purchase, or sell order on their platform and of course they want us to remain long term holders because they earn a management fee on their platforms each and every month we stay with them.
What is investing - Commissions and Fees
The good news for modern investors is that the cost of investing is much cheaper than it was several years ago. That said, there is of course still fees involved in investing, and the main ones are commissions and ongoing fees for platform administration, fund management fees and others for trading and transaction costs.
If you buy and sell stocks and shares you will be asked to pay a flat fee of maybe £10 to £15 per trade, plus a 0.5% stamp duty charge. If you buy funds or trusts, you may be able to buy them for free on some platforms, but there will then be an annual management charged by the fund manager which may be anywhere between 0.2 and 1.2%, and you will also have to pay the platforms fee, which can be anything from about 0.2 to 0.45% on top of this. As noted above it is also worth noting that many funds and trusts also have other transaction costs which may come in at a further 0.1 to 0.2% per fund.
It is very important to ensure you are not overpaying on commissions and fees as over the long term these can significantly erode the final value of your investment fund.
What is investing - Time frames for investing
The old adage for investing periods was for about five years minimum, however in more recent times it is suggested that a time horizon of nearer 10 years or over is better, in order to ride out the inevitable ups and downs of the stock market, and also benefit from the wonders of compound interest over that period of time.
If you realistically need your money back in just a couple of years, then investing probably isn't the correct vehicle for you, unless you can tolerate the risk of getting back less than you actually invested.
What is investing - Funds versus Stocks
As an investor, you will need to decide whether you invest your capital into individual stocks and shares or alternatively funds or trusts. Both funds and trusts are professionally managed portfolios of many different individual holdings, and automatically provide some diversification for your investments.
On the other hand, when you buy individual stocks and shares, you are automatically taking on a higher risk, as individual stocks and shares can have greater movements both up and down and are of course also subject to going bust in their entirety, and therefore you would lose all your investment.
What is investing - Diversification and Risk Reduction
As noted above, diversification is an important part of the investment journey. What we mean by diversification is simply not putting all your eggs in one basket as it were and spreading your investments around as many different stocks and shares, commodities, regions and sectors as possible, to give your portfolio some balance if some areas of the market take a tumble, then others may increase in value, therefore providing some risk mitigation overall.
What is investing - Summary
So, to conclude our “what is investing” summary, investing is a great way of building a significant nest egg for the long term and is very much recommended for as many people who can stomach the thought of investing, and also have the means of putting away their spare cash on a regular basis.
One advantage of being a new investor is that if you are just drip feeding relatively small amounts of money into the market, then any significant drawdown or fall in the market in the early months and years doesn't cause too much damage, in fact it can be seen as a buying opportunity to top up when you see the markets lower than perhaps they should be.
The final word on this subject is really to just get on with it, if possible, select a platform, select an investment fund / trust, and then set up a standing order to drip feed your cash in each and every month.
By investing money you have today, instead of spending it, you are building wealth and freedom for your future.
What is investing v Saving
Investing differs from saving in a number of ways. When you save, you are putting money aside in a savings product, with a bank or building society, that won’t lose your capital, but also won’t have the ability to grow very much. At this very moment in time, interest rates are as low as they have ever, and most banks pay quite literally nothing, 0.01%, so you earn zero on any money put in savings banks.
Saving can be for short periods of time and is often used for emergency funds, or for something specific, like a holiday, a car or a deposit on a house, and it is correct for such short term saving to be kept in bank accounts and not invested, because investments can go down quickly and significantly, so you wouldn't want your holiday funds losing half their value just before the holiday season, or you would end up in Butlins UK instead of the Maldives!
Investing on the other hand, is about trying to make your money grow significantly over time, using both capital appreciation, and the wonders of compound interest. When investing you are seeking an overall average return or circa 7%-15% per year return, although the actual returns will be very volatile and even negative in some years.
It is not a short term project, and should not be considered for periods of time of less than five years. Ideally, your investment time frame should be measured in decades, and be started as soon as possible.
Investing also involves risk, meaning your capital is at risk of reducing or even being lost altogether.
You will learn more about what is investing by reading the pages in this section of the website.