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Investing Explained: The Basics

What is investing? Why should I invest? How much money should I invest, and in what? All the basic questions, answered.
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Mintago Team

It’s not all r/wallstreetbets

We know investing can be a little intimidating, and even if you know people that do it, it’s hard to understand how the stock market works and dip your foot (and your hard-earned cash) in the water.

Here at Mintago, we want to actively promote and simplify the way investing is understood. Once you build that savings cushion, investing is a natural next step to get you closer to that financially free dream. 

Let’s start with the basic questions:

What is investing? 

Investments are something you buy or put your money into to get a profitable return. Chances are, if you’re employed and contributing to a pension scheme with your company, you’re already an investor! 

The principle of investing is that you put money into something and then in the future this goes either up or down. That’s where you often see the ‘capital at risk’ disclaimer from financial institutions. In order to make money from investing, you need to be aware that there is a level of risk involved. 

But don’t be afraid of risk. It’s impossible to predict the future and everything has an element of risk. Over the long-term you should know that investing tends to deliver better returns than holding your cash in a bank account.

Why should I invest?

If you’re looking at your long-term goals and wondering how your savings will ever make them happen, investing could be for you. You might have heard the saying: “The best time to invest is 10 years ago. The second best-time is today.” It’s a cliche, but the principle of starting early reigns true when it comes to investing. Through the beauty of compound interest, you’ll earn interest on any initial investment you’ll make, as well as all subsequently generated interest. That’s stacks on stacks of interest.

Saving £1,000 pounds a year in a compound interest scheme will be worth more than if you save £1,000 per year in the same account, every year from age 30-70.

As time goes by, the amount by which your wealth increases in value grows, even if the rate at which it grows remains constant. 

Investing is also a great source of passive income. Fundamentally, passive income is money that you make without having to do much work (in comparison to your day job, for example), and it’s also what those with a ‘’comfortable” lifestyle attribute to their freedom. Although the stock market can be volatile, the impact of volatility historically will be evened out by a conservative investment strategy, as well as the general increase of value in the economy. Even if you have a think on those who held stocks during the financial crisis, refusing to react and sell them at a loss like others and keeping them (for another 10 years perhaps) would have seen their money bounce back and double after the crash. 

How much money should I invest?

Like we mentioned earlier, investing works best when you’re trying to get returns for your long-term goals (> 5 years or retirement). Ultimately, there isn’t really a one-size-fits-all plan to investing and it all depends on your own circumstances and how much of an investment risk you are willing to take (the higher the risk, the bigger the potential reward). 

Things you should think about before investing include: 

  • What do you want to spend your money on, and when do you need this by? This might be a house, a holiday, or your children’s school fees.

Only invest money that you won’t need in the near future. You have to be prepared for your investments to lose value and still be level-headed and comfortable knowing that it will increase over time. Withdrawing money from your investments is also not as instant as other accounts, so keep in mind it won’t be useful for emergencies.

  • What can you afford to invest? Do you have short-term debts or large regular payments (like a mortgage) to consider?

It’s important to pay off high interest debt before you start investing. With expensive credit, you’re likely to get charged more in interest than you’d make in returns from investing. 

  • You don’t have to wait till you have £1,000 to start investing. There are a lot of ways you can now start investing from just roundups of your spare change!

What can I invest in?

Most people choose from 4 main types of investment:

  • Stocks & Shares: When a company wants to offer part of the business for sale on the markets, it issues stock. An investor can then buy shares (units) of that stock. Stocks are considered one of the riskier assets - their value can fall and rise spontaneously and their value is mainly derived from how well the company is presently doing or how successful people believe it will be in the future. 
  • ETFs: Exchange-traded funds (ETF) give investors exposure to a collection of bonds or shares in one package. They track a specific market, have low costs and liquidity, as well as allow investors to buy and sell whenever an exchange is open. 
  • Bonds: There are different types of bonds, but principally when you invest in bonds, you’re lending money to an institution. Bonds are usually a ‘fixed-interest’ asset, so they are considered less risky but with a more modest return than stocks. 
  • Commodities: Commodities, or also referred to as ETCs, are similar to ETFs but involve categories like metal (like gold), energy, livestock and meat, and agricultural products. Investors usually use ETCs to diversify their portfolio as the price of commodities tend to move in opposition to stocks during periods of market volatility. However, they are still relatively risky because they are difficult to predict.
A simplified way of looking at potential return/expected risk on different investments.

In general, there are three principle when you’re choosing what to invest in: 

  1. Minimise your tax! Utilise your ISA where possible. 
  2. Diversify, diversify, diversify! Besides investing in different types of assets, remember to utilise ETFs and other collective stocks that track the whole market rather than a specific company. 
  3. Leave your itchy fingers alone. Leave your investment for a specific timeframe - you can’t time when it will go up and down - and checking it constantly will only add unnecessary stress and tempt you to sell your position before it bounces back.

We will cover more on each of these in future posts, so keep your eyes peeled! 

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