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 in stocks and shares, it's hard to know what to expect. Here we explore some of the risks and rewards of investing.
Can you make money investing?
With a savings account, it's easy to know how much your money will grow as you're provided with an interest rate. Investing is less predictable because there are a lot more factors that influence how much your money could grow.
The value of your money could go up or down. But historically, money invested in the stock market has tended to increase more over 5 to 10 years than money in savings accounts.
What are compound returns?
If after your first year of investing, you've made a profit – let's say 5% – you then have more money to invest in your second year. Any profits you make in this second year will not only be on your original investment, but on the extra 5% too. This is a compound return.
So, the longer your money is invested, the more you could benefit from compound returns – as long as your money increases in value over that time.
Will I pay tax on my investments and returns?
In the UK, the government provide an annual ISA allowance which you can use to put money tax-free into savings, investments or a combination of both. Any returns you make on money up to this limit invested in an ISA will be tax-free. Returns you make on other investments – or money you add to an ISA once over and above the limit each year – will be taxable.
Can you lose money by investing?
Yes. You take more risk with your money by investing it instead of saving it. With savings, you'll see the value of your money grow steadily over time (albeit more slowly). Investments are likely to fluctuate much more and may go down as well as up.
Investments are meant for the long term and may be less accessible than savings. If you think you might need to take your money out at short notice, you risk prices being low when you need to sell and getting your money back can take a long time.
Can you minimise the risk of investing?
People who lost a lot of money through investments typically make investment decisions themselves and may invest too much in one company or industry.
The Money Advice Service says: "It’s usually a good idea to spread your risk by putting your money into a number of different products and asset classes" 1.
Take a look at our Stocks and Shares ISA for ready-made funds with different levels of risk.