New to Investing

Our step by step guide will help you through understanding the basics

Introduction

Before you invest for the first time it is important to understand the basics. We’ve put together a step-by-step guide to investments that we hope will clarify some of the broader benefits and risks.

It’s important to set aside money for your future, whether this is a rainy day fund to cover unexpected events, or for longer-term ambitions.

A sensible investment strategy can help you to plan for your financial future. There are many reasons why people invest, such as:

  • Planning for retirement.
  • Making arrangements for children’s education.
  • Offsetting the effect of inflation.
  • Aiming to achieve greater returns than by using a savings account.
  • Simply building a nest egg for the future.

Before deciding whether or not to invest, make sure you’ve considered the following:

Risk

Decide on the level of risk you are comfortable with, and invest accordingly. Some types of investment offer more reward, in the form of higher returns, but are riskier. Others offer more conservative returns, and are less risky. Always bear in mind that the value of an investment and the income from it can go down as well as up. You may get back less than you originally invested.

Emergency cash

It’s important to make sure you have enough easily accessible cash available to cover any short-term emergencies: anything from a broken down car to a flooded kitchen.  It’s a good idea to keep about three times your monthly salary aside.

Short-term debts

You should consider paying off any short-term debts, such as credit or store cards, before you invest. This is because you may be paying more in interest on those debts than you could earn by investing.

Protection for you and your family

If you do not already have cover in place, it may be worth considering Life and/or Critical Illness Insurance. This is to ensure you would be able to pay any bills or other important expenses in the event of the loss of a loved one or a serious illness.

Find out more about life insurance

You can either save your money in a traditional bank account, and earn interest, or invest it in the financial markets in the hope of better returns, which is riskier. We explain those risks in more detail below.

Investing

Investments offer the potential for greater rewards than using a savings account, but they do involve more risk to your money. To help smooth out the ups and downs of the financial markets it is normally recommended that you hold investments for the medium to long term. That is usually at least five to ten years. You can start investing from as little as £100 per month. Common investments include: company shares, bonds and managed funds. See our jargon buster for more detailed descriptions of these types of investments.

Investing for children

All parents and grandparents want to provide the best for the younger members of their family, and rising house prices and university fees today mean that they may really benefit from a helping hand from you in the future. If you want to consider a private education, or help them out financially when they start university or move out on their own, the earlier you start saving, the more you’ll be able to accumulate for them.

You could consider:

  • A managed growth fund, which focuses on increasing your capital
  • Investing for the long term in a Junior Stocks and Shares ISA
  • A life, critical illness or earnings cover protection if you’re planning to cover school or university fees out of your income.

See also:

Financial planning

Understanding investment risk

Saving

If you save with a bank or building society, you may have easy access to your money and can generally make withdrawals when you need to. In return you earn interest. It’s always a good idea to keep some money to hand for emergencies or to cover any short-term goals. There is a lower risk of losing your money but the impact of inflation may mean you can buy less with the same amount of money over time. Savings tend to be best if you don’t want to take any risks with your money, have a short-term goal in mind, and need easy access to some of your money.

More about saving vs. investing

Find out more about our savings product range

There are two main ways to invest:

  1. On your own: You can do your own research and invest your money yourself online without receiving professional financial advice. We have a number of guides and a range of products that could help you get started.
  2. With advice, for a fee: If you feel uncomfortable investing on your own, you can always take advice from a professional. But bear in mind that most independent financial advisers charge a fee for that advice. If you have savings and investments of more than £100,000, or sole annual income of more than £100,000, our financial advice servicehttp://www.lloydsbank.com/investments/financial-advice.asp can help. We will charge you a fee for this advice.

Whichever way you decide to invest - on your own or with advice - both approaches involve a degree of risk. It’s important always to keep in mind that the value of your investments, and the income you get from them, can go down as well as up.

You can find more information at the Money Advice Service, which offers guidance on a wide range of financial subjects, as well as details of Independent Financial Advisers in your local area.

How do I invest my money?

Once you’ve made the decision to invest, you can either:

  • invest a lump sum or
  • invest monthly to build up your investments over time.

There are benefits to investing regularly. First, there is the simplicity of paying for your investments out of your regular income. Second, by investing regularly you will not be investing in the stock market at one fixed point in time – as you would be with a lump sum. Because the value of any investment will rise and fall over time, investing the same amount each month can help to smooth out ups and downs in the markets. This is because you’re buying at different prices on a regular basis.

What is an ISA?

ISAs are a tax-efficient way to save or invest your money. They make a great starting point for any savings or investment plan. This is because any interest or investment returns you make on your money – if it’s saved in an ISA - will not be taxed.

How much can I put aside tax-free?

Each tax year the government sets a new limit on the amount of money you can put aside into an ISA. In this tax year (2017/2018) the limit is £20,000.

There are four kinds of ISA:

  1. Cash ISAs: Cash ISAs are essentially just savings accounts, except you do not pay tax on the interest you earn. Most providers will let savers choose between a fixed or variable rate of interest. If you want easy access to your money, the level of interest you will be paid will tend to be less than if you lock up your money for a longer period.
  2. Stocks and Shares ISAs: If you open a Stocks and Shares ISA you can use your allowance to invest in the stock market. You won’t be taxed on any returns that you make on your investments.
    Launch our calculator (opens in a new window) to see how much a stocks and shares ISA could be worth in the future.
  3. Innovative Finance ISAs: Innovative finance ISAs are a new type of ISA, which was launched in April 2016. They allow peer-to-peer lenders to loan money without paying any tax on interest earned.
  4. Lifetime ISAs: Introduced in April 2017 the Lifetime ISA will allow you to use some or all of the money to buy your first home, or keep it until you’re 60. You also receive a government bonus of 25% (up to £1,000) a year.

Can I split my ISA allowance?

You can choose to invest your allowance into a Stocks and Shares ISA, Cash ISA, innovative finance ISA or Lifetime ISA. You can split your allowance between a combination of the four, it all depends on how much risk you want to take.

It is worth bearing in mind that the government will tax you according to your individual circumstances, for example your income. These circumstances, and the tax that you pay, could change in the future.

Find out more about ISAs

Having reviewed the steps to investing, you may now feel ready to invest. But before you go any further, please read the statements below and check that you agree with all of them:

  • You have enough easily accessible money to cover emergencies.
  • You are happy to accept some risk on your investment.
  • You are prepared to invest for the medium to long term (at least five to ten years).
  • You do not have any significant short-term debts.
  • You feel confident and knowledgeable enough to make your own decisions.

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