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New to investments

There are various types of investment – some will be right for you and others won't. It all depends on your attitude to risk and what you are trying to achieve with your investments.

Think about why you want to invest. Perhaps you are looking for an investment to provide money for a specific purpose in the future. Alternatively, you might want an investment to provide extra income.

This section will help you understand the key issues to consider when investing.

Things to think about before investing

  • How much can you afford to invest?
  • How long can you afford to be without the money you’ve invested?
  • What do you want your investment to provide – capital growth (your original investment to increase), income or both?
  • How much risk and what sort of risk are you prepared to take?
  • Are you happy to go it alone, or do you want to share costs and risks with other investors?
  • Do you want to be consulted on investment decisions, or are you happy for your fund manager or stockbroker to do this for you?
  • If you decide to invest using pooled investments consider which type would be most suitable for you. The main differences between the pooled investments are the tax position and the risks (especially investment trusts and with-profit funds).
  • What are the tax benefits implications – what tax will you pay and can you reduce the tax?

Risk

When deciding whether to invest, it's key to ask yourself how comfortable you would be facing a short-term loss in order to have the opportunity to make long-term gains? Risk is a very personal thing – what may be a small amount of risk to one person may be huge to another.

The important thing to remember is that with investments, even if your investment goes down, you will have only actually made a loss if you cash it in at that time. When you see your investment value fall, this is known as a paper loss as it is not a real loss until you sell.

If you are going to invest, you need to be prepared to take some risk and to see at least some fall in the value of your investment.

Firms have to give you clear risk warnings about the products they sell or advise on and have to explain these risks to you fully. They also have to make sure the product is suitable for you – see Getting help

Some shares carry a higher risk than others – see Investing in higher-risk shares.

Living with risk

Risk can never be eliminated but it is possible to manage it, by diversification – spreading your risk. Different investments behave in different ways and are subject to different risks. Putting your money in a range of different investments helps reduce the loss, should one of them fall.

It is also important to remember that risk and reward generally go hand in hand. The more risk you are prepared to take, the higher the potential reward. If you are not prepared to lose any of your money under any circumstances then you have to accept a lower level of return. If you see an investment promising a high return at little or no risk, be very wary. The old saying 'if it looks too good to be true, it probably is' almost always applies to investments.

The following chart shows asset risk and return. Generally the lower the risk, the lower the potential reward:

chart displaying the relationship between investments, their potential returns and their associated risks

Currency risk

You should also be aware of currency risk. Currencies – eg sterling, euro, dollars, yen – move in relation to one another. If you are putting your money into investments in another country then their value will move up and down in line with currency changes as well as the normal share price movements.

Inflation risk

Although we usually talk about the risk of losing money, there are other risks to think about. One is inflation risk. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important aim.