Investing for beginners
A simple guide to help you towards your first investment
At its most advanced level, investing is a complex mix of science, data, and instinct.
But it’s actually pretty straightforward to get started. Almost anyone can learn the basics and confidently take the first few steps towards growing their money over the long-term.
From there, you can build your knowledge over time or stick with a simple strategy that works for you. Let’s go through the basics.
The purpose of investing
Investing is a way to grow your money – similar to saving, but with more ups and downs. Over many years, investing can grow your money by a lot more than savings can, so it’s usually considered a better choice for long-term goals.
Unlike saving, investment returns aren’t guaranteed. Over short periods, you might see a lot of ups and downs in the value of your investments. But over several years, there tends to be more ups than downs - so your investments can end up worth more than you put in.
Because of the fluctuations, investing shouldn’t replace saving. Both play a role in growing and protecting your money over time.
Saving helps you keep cash on hand for unexpected expenses. It’s also a good way to achieve goals within the next 3-5 years, such as buying a house or car, where a short-term loss could derail or delay your plans.
Investing is more suitable for goals that will take more than five years, such as preparing for retirement or building a pot of money for your child’s future, or simply to grow your money over the long term. In these cases, it’s the overall growth that matters a lot more than the short-term changes.
Types of investments
Investments are usually grouped into five main categories. These are called asset classes:
Cash – money held in a bank
Bonds – loans to companies
Equities – shares in companies
Property – residential or commercial properties
Commodities – things like gold
Alternatives – things like cryptocurrencies
You can invest in these directly, like by purchasing shares in a company or buying a house to rent out. But it’s more common, especially for beginners, to do it through an investment fund.
A fund is a way for lots of investors to pool their money and buy a set of investments together, often chosen by an expert. It’s a bit like joining a guided adventure holiday rather than planning a solo trip.
Some funds invest in one asset class, such as equities. Others invest in multiple asset classes, e.g. 50% equities, 25% bonds, 20% property, 5% cash.
At Zopa, you can choose between two depending on your risk-level: Balanced or Bold. Both funds invest your money across a range of bonds and equities, companies, industries and countries – so your eggs aren't all in one basket (a strategy known as diversification).
How investments grow your money
Let’s start with the asset classes you’re probably most familiar with. With cash, you can grow your money by earning interest on deposits with a bank or building society. With property, you can grow your money in two ways:
By buying and selling it, hopefully at a profit (also called a return)
By charging someone rent to use it, which delivers an income.
Most investments work in a similar way. They can generate income while you hold them, or grow in value so you can sell at a profit. Bonds usually pay regular interest payments, and when the bond ends, you get back the original amount you invested.
Shares, meanwhile, sometimes pay dividends (a share of the company’s profits) – and you can often sell your shares later for more than you paid to make a profit.
If you invest in a fund, income and profits are often automatically reinvested rather than paid out, so you may not see them directly.
Risk and return
All investments carry some risk. This means there is a chance you could lose money or that the value of your investment could go up or down over time.
Generally, investments that offer the potential for higher returns also come with a higher level of risk. In simple terms, this often means their value is likely to rise and fall more sharply.
If we compare the asset classes, cash involves the least risk and offers the lowest potential return, with very little chance of losing money: it’s rare for the balance in a standard savings account to fall (unless you withdraw money).
Shares (equities) involve more risk, but also offer the potential for higher returns.
Cryptocurrencies are an example of a high risk investment, meaning there’s the possibility of large gains and the possibility of large losses.
Who should invest
There are misconceptions that only very wealthy or very financially experienced people should invest. In reality, many people can benefit from investing.
Following a few guidelines can help protect you from losses you can’t afford. You should:
Have some money to invest that you won’t need in the short term (roughly, the next five years). Over this period, you’ll probably see ups and downs, but over time you’d expect the value to rise.
Have a separate cash savings buffer – some people call it an emergency fund. This should cover about 3-6 months of essential outgoings, if needed. It helps ensure that you won’t need to sell any of your investments while their value is down.
Have no short-term, high-interest debts. If the interest rate on your debts is over 8%, you’re likely to improve your financial situation more by paying them off than by investing the money.
Choose investments that are suitable for your experience level. There are some investments, like futures and options, that can raise the risks immensely and aren’t ideal for beginners.
Invest in a wide enough range of investments and choose different types, so that they won’t all drop in value at the same time. If you invest in a fund, this is taken care of for you.
How to get started
To start investing, you’ll need to decide:
1. Who to invest with
There are around 50 providers in the UK offering investment accounts, including Zopa. You might want to compare a few providers based on the app experience, the ease of signing up, the investments they offer, and the costs (as well as any other factors that are important to you).
We know account fees can feel confusing or off-putting, especially if you’re just getting started. At Zopa, we’ve kept the fees transparent and low – just 0.54% each year – and there’s no Zopa management fee at all for your first 3 months, so you'll only be charged the fund fee of 0.14%.
2. What type of account you need
There’s a Stocks and Shares ISA, where you won’t pay tax on the growth, but there’s a £20,000 limit on contributions in each tax year (shared with any other ISAs you have).
Or there’s a General Investment Account, which has no annual limit but offers no tax protection.
Zopa offers both – just choose the option that’s best for you. Remember, the amount of tax you pay depends on your personal situation, and tax rules can change.
If you’re investing for retirement, you might also want to consider a pension or Lifetime ISA.
3. What to invest in
Some providers offer hundreds of different options, which can be an advantage for experienced investors who know what they’re looking for, but can be overwhelming for a beginner.
At Zopa, we’ve kept it simple. We’ve created two investment funds – Balanced or Bold – to suit some of the most common needs and goals of Zopa customers.
Once you’ve made these three decisions, you can be investing in minutes. You might feel nervous about making the “wrong” choice, but you can change providers, accounts or investments later if you need to. Getting started is what matters most.
