Investing Explained...
Personal Investing is simply the act of committing funds to an endeavour (a business, project, real estate, etc.), with the expectation of generating an income or profit. We understand that many of you may be experienced at this, but that many of you may not!
So allow us to talk you through some of the basics, as well as guiding you through a few definitions and frequently asked questions.
And if what you’d like to know isn’t here? Just download our beginners guide.
Some Key Words & Phrases...
Asset-backed Investment
An investment whose financial security is in the form of underlying assets (e.g. land, loans or receivables)
Bond
A bond is a fixed income instrument that represents a loan made by an investor (you) to a borrower.
Broker
A person who buys and sells goods, assets or investments on behalf of others.
FCA
The ‘Financial Conduct Authority’: the financial regulatory body in the United Kingdom
Fixed Income
An income from an investment that is set at a particular figure, and does not vary.
Fund
A sum of money saved or made available for a particular purpose (e.g. to collectively purchase further stocks, bonds or other securities)
High Net Worth (individual)
An individual who had, during the financial year immediately preceding the date in question, an annual income to the value of £100,000 or more (or other equivalent measure)
ISA
Individual Savings Account. A scheme allowing individuals to hold cash, shares, and unit trusts free of tax on dividends, interest, and capital gains. In 1999 it replaced both personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs).
Legal Charge
The right that an organization or person that lends money has to take someone's property if that person/organisation does not pay back the money they borrowed, in ranking order.
Legal Title
Clear and enforceable title representing legal ownership of an asset or property.
Property (Commercial)
Buildings that are constructed or in the process of, to be used for business activity.
Property (Residential)
Buildings that are constructed or in the process of, for use as a dwelling.
Rental Assurance
A form of rent whereby the developer will contractually guarantee a gross or net rental return directly with the investor.
Return
The money made or lost on an investment.
Sophisticated (individual)
A category of individual who is able to certify certain criteria regarding professional status and investment experience.
Term
Length of time you are investing for (e.g. 5 years)
Common questions answered...
How Much Does It Cost to Invest?
What Happens if I Want My Money Back?
Do I Pay Tax on Money I Earn from investments?
Do I Need a Broker to buy/enter into investments?
Investing seems complicated. How do I get started?
What type of investments are available?
Can I invest? Do I qualify?
How much money do I need to get started?
How much risk should I take?
What does ‘risk’ mean?
Where do I start with investments?
How Much Does It Cost to Invest?
Aside from the money you invest, there may be a fee to enter into or place your investment. In the case of property buying, you will ne to pay a solicitor, whereas in the case of buying stocks or bonds you will be charged a fee by a broker, and these fees can vary. It is usually free to open a brokerage account, but you will be charged a combination of annual management fee and a placement fee for each investment made – both are usually a percentage of the investment value involved.
What Happens if I Want My Money Back?
This would all depend on the type of investment you have made. If you have purchased property you would have to find a buyer and agree a price. Some developers will offer a ‘buyback’ incentive that allows you to trigger the sale of the property back to the developer during a specified time period. If you have purchased bonds or entered an investment fund then these may either be fixed term investments that do not allow early exit, or they may allow it with a penalty for doing so (e.g. 5% of investment value in year 1).
Do I Pay Tax on Money I Earn from investments?
Most of the time… Yes.
First, the value of your investment can increase over time, which is known as a capital gain. You won’t pay taxes on this until you sell the investment and the gain is “realised.”
Second, you may also be liable for tax on any investment that also provides an income during the investment term. You are always advised to seek taxation advice based on your own personal situation.
Individual savings accounts (ISAs) are a tax-efficient way to save, as your returns are free of income tax and capital gains tax during your lifetime.
Do I Need a Broker to buy/enter into investments?
Sometimes. When buying stocks, shares or bonds, a broker would be required to place your investment. Once upon a time, investors phoned their brokers with instructions to buy and sell stocks on their behalf for a commission. Today, investors don’t need to. Instead, you can go directly to an online brokerage firm. There are many out there with good reputations and low fees.
Other methods of investing such as buying property do not require a broker, although as you would expect, you will need a solicitor.
Investing seems complicated. How do I get started?
In short? Come to us. We always recommend scouring the market, and also seeking Independent Financial Advice, but we are a friendly place to start and we are happy to answer any questions at all.
What type of investments are available?
Stocks are one of the most common options available. This is simply buying a slice of ownership in one or more companies. Bonds – investments whereby you loan money at a fixed interest rate, are another popular investment method. Bonds tend to offer lower returns as there is typically less associated risk, and no dependency on market fluctuations. Beyond these, there are commodities and property as other investment methods. You can invest in commodities (raw materials) directly by physically purchasing them (e.g. gold bars) or you may wish to invest in funds that track the commodities markets (exchange traded funds or ETF’s). Property can also be invested in by physically buying it, or through vehicles such as REITS (Real Estate Investment trusts) which own and operates property that produces an income.
Can I invest? Do I qualify?
Yes, for some, Maybe for all. Some investments are available for retail investors, meaning for non-professional individuals. Some may be entered into provided you have fully reviewed all of the required information, whereas others may require full Independent Financial Advice. Other investments may require that you are a declared High Net Worth or Sophisticated Investor (see glossary for definitions)
How much money do I need to get started?
Any amount. You can invest from as little as £5 in investments such as peer to peer lending (online services matching lenders with borrowers), although as you can imagine, this significantly increases if you wish to invest in for example, property (buying a house or apartment). There are many investments such as bonds and funds that have minimum investment values of between £2,000 and £10,000.
How much risk should I take?
This would all depend on your attitude to risk and your capacity for loss. You should always balance the risk with its reward and also assess what you can afford to lose as investments can go up as well as down. We always recommend that you look for investment that have a good level of underlying security.
What does ‘risk’ mean?
When you invest, you’re accepting some risk because we can never know exactly how well an investment will perform. Maybe the opportunities you are investing in will outperform expectations and you’ll get more money than you were hoping for. Maybe they will do the opposite, their valuations will drop and you’ll lose some of your investment.
An investment of any kind is all about balancing risk and reward. In general, riskier bets come with more potential for upside, but this also can mean things could go the other direction as well, resulting in a loss. On the flip side, a more conservative approach — like bonds — limits both the potential for upside and downside, and results in a much smoother ride.
Where do I start with investments?
Your first step is to decide what you want to achieve. Are you saving for a specific short-term goal, such as a deposit for a property? a new car? or to pay your children’s university fees? Or are you saving for the long term, to fund your retirement? Your answers will largely determine how and where you invest, based on the potential returns and also the time that your money is committed for (the investment term).
Common Investing Myths
“it’s all over my head a bit that”
“I wouldn’t even know what a bond was”
“the thing is, you need a lot of money to begin with”
“but then your money is tied up though, right?”
“I’ve always really wanted to but…”
“it’s all over my head a bit that”
We’re not surprised! Some of the words that are used are unusual and intimidating, as well as some of the phrases and descriptions. Thankfully, most investments that are available in the general market are actually very simple, and just need explaining better. Were convinced we can explain any investment to any person! In a way that you’ll understand. Try us!
“I wouldn’t even know what a bond was”
And we wouldn’t expect you to! Its okay to ask what something is, because until you know…you don’t know! We like to explain what everything is, and we don’t expect you to know anything beforehand.
“the thing is, you need a lot of money to begin with”
This is a common misconception and simply isn’t true! So many of us think that only the wealthy can invest, without realising that maybe it was investing in the first place that made them wealthy! In reality, and particularly recently, there are investments out there from as little as £5. While investing larger sums may open up opportunities to more investments and higher returns, there really is something out there for everyone to get going and start achieving good returns.
“but then your money is tied up though, right?”
Not necessarily. Sure, there are many investments that require that you commit for a certain length of time. A bond for example may require that you commit your funds for 5 years say, whereas a listed investment (one that is available to buy and sell on a stock exchange) can be bought and sold at ANY time. Even with some longer investments, there are many different investment terms available (e.g. 1, 3, or 5 years), but also there are investments that give you the option to withdraw your investment at any, or certain times. What is important is that you choose an investment that suits you, your objectives and our timeframe.
“I’ve always really wanted to but…”
Well why don’t you? Whilst we never have to encourage you to invest, we also want to make sure that if you wish to, or if you would benefit from doing so, that you at least have all the information you need and have suitable general guidance, to help you understand what you can do and how you can do it. You are always advised to seek Independent Financial Advice, and in some cases, you are required to. And if you simply want help with understanding how investing works and what you can invest in, speak with us and we would be delighted to help you.
