Investors generally aim to make their money work harder for them than perhaps cash is at the moment. However the prospect of investing can be intimidating and it is often difficult to get to grips with what is risky and what is not. Learn all the basics below that will help you to understand if investing is right for you and where to go to for help.
Where Do I Begin To Know How To Invest?
If you have never done anything like this yourself, I would always recommend that you speak to a well-qualified Financial Adviser. If the idea of it seems expensive, things to remember are:
- Most advisers will give you an initial consultation free
- Advisers can often buy investments and the wrapper that you need cheaper than you can
- Lots of investment companies will not deal with you, unless you’ve come through an adviser
- Getting it wrong can be costly
Having said this, that doesn’t mean that you shouldn’t educate yourself so that you can have confidence in what your adviser is recommending.
There are 4 things that you need to consider when deciding if investing is for you:
Risk– Not all investments need to be high risk. The investment risk spectrum can range from Cautious to Adventurous. When there is a downturn in the markets, you would expect a cautious investment to still fall, but not as much as a balanced or adventurous investment. Conversely in a growing market, a cautious investment will not usually increase in value as much as a balanced or adventurous one.
Time– How long do you want to invest your money for? If the time frame is less than 5 years, you really shouldn’t be investing the money at all. This is because you are not giving the investment time to work hard for you.
Access – If you need to touch this money in the next 5 years, you really shouldn’t consider investing
Tax – You should never judge an investment on the tax benefits alone, however it is important to understand how an investment is taxed at the end.
If you decide that investing is for you, there are 4 broad asset classes that are used when building an investment portfolio. These are cash, bonds, commercial property and equities. I’m sure there is no doubt as to what cash is, but bonds are a little more unknown.
There are two types of bonds – Gilts and Corporate Bonds:
Gilts – are where you lend money to a government over a set time period. The government promises to pay a percentage each year and then you get your money back at the end. A less stable country will have to offer higher returns to attract investment compared stable economies.
Corporate Bonds- Are the same as Gilts, but instead of lending the money to governments, you are lending it to companies.
Equities– Are investments in the stock market, i.e. you buy a share in a company. Often people buy funds of equities which are a collection of equities.
Commercial Property is where you invest in office, factories etc. rather than homes.
Can I Use A Stocks & Shares ISA If I Already Have A Cash One?
Yes, you can. Here are the rules you must follow: 1. In this tax year 2015/16 you can pay in £15,240 into either a cash ISA or Stocks and shares ISA and you can split the amount between the two should you wish.
Benefits Of An ISA
The easiest way to describe the benefits of an ISA, is to explain what happens in you don’t use one.
First let’s talk about cash. If you save cash in an account that pays you 2% per annum, if you have £1000 saved, you will receive £20 in interest. As this is not in an ISA, the interest is taxable. Therefore, the bank automatically takes of 20% and pays £4 to the tax man; you therefore will only receive £16.
If you are a basic rate tax payer, there is nothing else you need to do. If you are a higher rate tax payer you pay 40% tax, you therefore owe the tax man another 20% i.e. £4, which means your net return is £12. If you’re and additional rate tax payer, you pay 45% tax and therefore owe an additional 25%. You therefore owe an additional £5, this means your net return is £11.
If this £1000 was in an ISA that was also paying 2%, you wouldn’t pay any tax and therefore receive the total £20. It also saves having to declare the interest on your tax return.
Other advantages of an ISA are:
- No tax on any of the income you receive from your ISA savings and investments. This includes dividends, interest and bonuses
- You pay no capital gains tax arising on your ISA investments
- You do not have to declare income and capital gains from ISA savings and investments on your tax return