Investments are something you buy or put your money into for a profitable return over time. Same is with investing for beginners who can invest in four main types of investments, known as ‘asset classes’:
Cash – the savings you put in a bank or building society account
Fixed interest securities (or bonds) – you loan your money to a company or government
Shares – you buy a stake in a company
Property – you invest in land or physical building – commercial or residential
Apart from these, there are other types of investments as well which include:
Commodities like oil, coffee, corn, rubber or gold
Contracts for difference, where you bet on shares gaining or losing value
Collectibles like art and antiques
The various assets owned by an investor are called a portfolio. As a general rule, spreading your money between the different types of asset classes helps lower the risk of your overall portfolio underperforming. This is especially relevant for the purpose of investing for beginners.
Returns are the profit you earn from your investments. Depending on where you put your money it could be paid in a number of different ways:
Interest – comes from cash deposits and fixed interest securities
Dividends – comes from shares
Rent – comes from properties
There is capital gain or loss which is the difference between the price you pay and the price you sell for.
Fees reduces investment returns
There is a fee charged by service providers involved in managing investments which takes time and money. This cost can consume part of the returns you’ll receive and it’s something you should ask about before you invest.
None of us likes to gamble with our savings but the truth is there’s no such thing as a ‘no-risk’ investment.
However safe you may think an investment to be, you’re always taking on some risk when you invest, but the level of risk varies for types of investment.
Money you place in secure deposits such as savings accounts risks losing value in real terms over time as the interest rate paid won’t always keep up with rising prices or inflation.
On the other hand, index-linked investments that follow the rate of inflation don’t always follow market interest rates. This means that if inflation falls you could earn less in interest than you expected.
Stock market investments may beat inflation and interest rates over time, but you run the risk that prices may be low at the time you need to sell which could result in a poor return or, if prices are lower than when you bought, losing money.
When beginning with investment, a good idea is to spread your capital (diversification) – by putting your money into a number of different products and asset classes. That way, you have option to fall back on if one investment doesn’t work the way you want.
When to start investing?
If you’ve got lot of money in your cash savings account – enough to cover you for at least six months – and you want to see your money grow over the long term, then you should consider investing some of it.
The right savings or investments for you will depend on how much risk you are prepared to take, together with your available finances and future goals.