Heard stories about people who've easily made a lot of money on the stock market? Or horror stories about people who've lost money through poor investments?
If you're new to investing, it's hard to know what to expect. Here, we reveal some of the risks and rewards of investing, before you open a stocks and shares ISA.
Can you make money from investing?
Yes, you can aim to make money from investing. In fact, money invested in the stock market over five to ten years has tended to go up more than money in savings accounts.
However, investments fall as well as rise in value, and you could get back less money than you put in.
This makes investing less predictable than savings, and you do not know what the rate of return on your investments will be in advance.
Savings accounts show you the interest rate beforehand, so it's easy to know how much your money will grow.
Can you lose money by investing?
Yes. Let’s say you want to sell your investments at short notice to get your money back, for example.
If you sell your investments in a hurry, you may end up selling for less than you paid. This means you'll make a loss.
Also, depending on what investment you're trying to sell, it could take you a while to get your money back. This makes investing a higher risk than saving.
With savings, you're guaranteed to see your money grow in value over time. And, depending on what savings account you have, you may be able to get your money back sooner. While savings guarantees a rate of growth, it can be impacted by inflation. No one knows how quickly prices will increase in future, so if your savings don’t grow as quickly as prices increase, the spending power of the money becomes less over time.
Can you minimise the risk of investing?
One way to lower your risk level is to spread your money across different asset classes, like shares, funds, bonds, and property.
If you put too much money into one company or industry, then you run a higher risk of losing your money.
Will I pay tax on my investment profits?
You may have to pay tax on any profits you make on investments not in an ISA.
You won't pay any Income or Capital Gains Tax on any profits you make from the money held in an ISA. However, there is a limit to how much money you can contribute to your ISAs. For the 2020/21 tax year, your annual allowance across all ISAs is £20,000.