How to invest money in the UK: a beginner’s guide

Investing is an excellent way to grow your wealth – whether your goal is to buy a dream family home, retire early, or help fund your child’s education. It’s also very easy to get started. As little as £10 a month can give you access to fascinating asset classes and international companies.

So, what do you need to know? In our guide on how to invest money, we’ll explain the various options and reveal the best way to build a diversified portfolio. We’ll also cover risk management and market volatility, as well as how to avoid common investing mistakes that can harm your longer-term objectives.

Set your investment goals

Everyone’s financial needs are different. Some will be looking at how to invest small amounts of money, while others could have received a large inheritance. You need to be clear on why you’re investing, what you’re hoping to achieve, how much you can afford to put away, and the return you need to earn. 

For example, you could be investing for a particular event, such as taking the family away to celebrate your wedding anniversary. Maybe you need an extra revenue stream to help make ends meet – or possibly you’re relatively comfortable and want to build a bumper pension pot for your retirement. The fact is that your goals dictate which asset classes to consider, how much to put away each month, and the amount of risk you’re comfortable taking.

Understand the main investment options in the UK

Here are the various options for anyone considering how to invest money in the UK. 

Stocks and shares — via UK stock market or global funds

Shares, also known as equities, are often the first option that comes to mind when someone starts exploring how to invest money to make money. When you buy shares in a company listed on a global market, such as the London Stock Exchange, you become a part-owner of that business. Share prices fluctuate in response to market demand. If the company announces good news, then more people will want to own the stock, and their price will rise. Conversely, if a company announces disappointing quarterly results or operates in a sector experiencing a downturn, investors may sell their shares. This means their value will fall. Individual company shares can be bought through a traditional stockbroker or online investment platform. We’ll explore these options later.

Bonds — gilts (UK government bonds) and corporate bonds

The concept of a bond is similar to an IOU. You loan money to either a government or a company in exchange for a fixed rate of interest over a set period, and your original investment is returned on a future date. Bond issuers are rated according to the likelihood that they’ll meet their interest requirements and not default on these obligations.

Funds — index funds, ETFs, actively-managed funds

Of course, buying shares and bonds can be risky as you’re pinning your hopes on the performance of individual names. However, there is an alternative. You can purchase units of investment funds that offer exposure to a broader range of asset classes, countries, sectors and companies. 

There are different types. As their name suggests, index funds will track a particular stock market index, often by replicating its holdings. Their job isn’t to outperform this market but simply reflect its performance. Therefore, if you have a FTSE 100 tracker and the index rises, you’d expect your fund’s value to have also increased. A similar concept is the Exchange Traded Fund (ETF). These are baskets of securities that are bought and sold on stock markets via a brokerage. 

Then you have actively-managed portfolios. These are run by professional investors who are responsible for setting the asset allocation and selecting individual holdings. 

Cash and savings — premium bonds, high-interest savings accounts

In theory, this is the safest option for your money. You tuck it away in a bank or building society that pays you a set amount of interest. Having at least some money in cash makes sense, particularly if you’re building a so-called rainy day fund of money to use in an emergency. However, you need to be careful. If the rate of inflation is more than you’re earning in your savings account, the value of your cash is effectively falling.

Property — buy-to-let or REITs

By property investing, we mean gaining exposure to actual bricks-and-mortar buildings rather than buying the shares of companies involved in the sector. For example, you may be able to secure a house or commercial premises through a buy-to-let mortgage. This will enable you to rent it out and earn an income from your tenants. 

There are also Real Estate Investment Trusts (REITs). These are companies that own and operate income-producing real estate. They can pool investors’ money and use it to purchase large commercial properties worth millions of pounds in the hope of producing a steady income and longer-term value appreciation.

Alternatives 

The final type of investment is a catch-all category that includes anything broadly deemed non-conventional. A good example is gold and other precious metals. Investors can either buy the physical asset or invest in products such as commodity exchange-traded funds. Of course, this umbrella term also covers assets suitable for more experienced investors, such as private equity, venture capital and hedge funds.

Choose the right investment account

There are many ways to buy – and hold – various investments. The right option for you will depend on your personal circumstances.

For example, Individual Savings Accounts (ISAs) are wrappers that shield your savings and investments from income and capital gains tax. Under the current rules, every adult in the UK can invest up to £20,000 every tax year in these products, which have become increasingly flexible over the years.

Then you have pensions. For those looking to the longer term, pensions are definitely worth considering, as there are key advantages. Contributions receive income tax relief, and SIPPs (Self-Invested Personal Pensions) now offer more choice and flexibility. However, restrictions apply to contributions and withdrawals.

Decide how you’ll invest

There are different ways to invest. You can do it all yourself, hand the entire job over to a financial adviser or opt for the middle ground of a robo-adviser. 

Here, we set out the various pros and cons of each.

Build a diversified portfolio

The harsh reality is that no investment will be 100% risk-free. However, you can reduce the likelihood of losing everything by building a diversified portfolio. In simple terms, this means having exposure to a diverse range of asset classes, including equities, fixed income, and property. It’s possible to increase diversification by breaking down each asset class by factors, such as sector exposure and geographical location.

Start with regular contributions

One of the biggest misconceptions about investing is that you need a substantial amount of money even to get started. The good news is that you can begin your journey from as little as £10 a month, and you’ll be surprised by how quickly your savings can grow through compounding. This will be particularly welcome news for anyone researching how to invest in stocks for beginners with little money.

Investing regular sums every month, via an automatic direct debit, also enables you to benefit from pound-cost averaging. The idea is you buy units of a fund each month – at whatever price they are currently available – and take advantage of any market dips. For example, if you regularly invest £200 into a fund and have been buying units at £6 each, should they fall to £4, you will get more for your money. 

Monitor and adjust your investments

The stock market changes constantly, so you’ll need to regularly audit your portfolio to ensure it still meets your needs. Are you happy with its positioning? Have you got exposure to the right combination of assets? Is it on track to deliver the returns needed?

A key part of this examination will be looking at the performance generated. Has it achieved what you’d hoped, or has it lost money? Whatever’s happened, it’s crucial to understand why. For example, if you’ve invested in an actively-managed fund, read through the monthly updates to see what has worked well – and what has underperformed.  

Avoid common investing mistakes

Here are some of the most common errors made by investors.

1. No plan in place. Buying various assets without careful consideration can harm your chances of meeting your financial goals. You need a proper plan in place and to monitor it regularly.
2. Overlooking fees. The various fees levied by providers can have a significant impact on the returns received, so it is essential to understand the charging structure.
3. Taking too much risk. Everyone wants to earn bumper returns but remember that increasing your possible returns will involve taking on more risk. Ensure you don’t leave yourself vulnerable.
4. Panic selling. When the value of an asset takes a tumble, it can be tempting to head for the exit immediately, but this may not be wise. Take the time to understand what has happened before making a rushed decision. It can even be a good time to buy more.
5. Being too greedy. Conversely, overstaying your welcome isn’t a good idea. When a stock market position is soaring, it can be easy to stay invested too long, rather than locking in your gains.
6. Timing the market. Another temptation is to time the market, meaning attempting to maximise your returns by predicting when the market will rise. Even professional investors find this impossible.
7. Ignoring diversification. Pinning your hopes on a few assets is a risky strategy. If it works, you may benefit; however, if they underperform, you could lose everything.

That’s why it’s vital to know what you’re trying to achieve, decide the most suitable strategy and stick to this plan.

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Managing risk and market volatility

Anyone looking at how to invest money must consider market volatility and the different ways to manage the risks being taken. Stock market fluctuations, interest rate movements and changes in exchange rates can all negatively impact your portfolio. That’s why it’s important to have a diversified portfolio. Should one holding take a tumble for some reason, the hope is that another will be rising. 

Of course, there will be times when the entire market drops, and it makes sense to stay invested, ride out the tough times and enjoy the recovery. A prime example was COVID-19. The pandemic saw global stock markets plummet by more than 30% but they ended up bouncing back and going on a strong rally. 

Whatever your goals, however, a golden rule is not to invest anything you can’t realistically afford to lose; otherwise, you will have plenty of sleepless nights.

Investing for income in the UK

Investing for income is a strategy favoured by individuals wanting to generate a revenue stream from their chosen holdings. For example, individuals – and fund managers – can buy shares in stocks that share the profits they generate with shareholders. These payments, known as dividends, can be either distributed to the investor as a reward for their loyalty or reinvested back into the fund. Equity income funds are a suitable option for those who favour this approach. You can find those focusing on UK-listed names as well as those that can invest globally.

Investing for retirement in the UK

One of the most popular reasons to invest is building up a substantial nest egg that will help people through their retirement. The most suitable assets will largely depend on your age. If you’re in your twenties with decades of work ahead, you can afford to endure stock market volatility and invest in growth stocks.

However, if you’re just a few years away from retirement, you may want to put the bulk of your money into lower-risk assets. Depending on your situation, a Self-Invested Personal Pension (SIPP) may be worth considering. However, it’s worth getting some independent financial advice if you’re unsure.

FAQs

How do I start investing in the UK?

You can open a Stocks and Shares ISA with various providers, including investment platforms and wealth managers. Depending on your solution, you can select your own investments or choose a managed portfolio tailored to your risk level and time horizon.

Do I need a lot of money to invest?

No. Even £10 per month is a solid start for your investment journey as you’ll soon benefit from compounding. You can always increase this amount at a later date.

What’s the safest way to invest my money?

No investment is risk-free. However, you can reduce the risk taken by having a diversified portfolio and embracing lower-risk funds.

Should I invest all my savings?

No. You need to have a so-called rainy day fund, ideally held in cash, that you can access in an emergency. Ideally, have enough for you to cover three months if you’re out of work.

What’s better: stocks or funds?

Buying shares in one company is obviously riskier as you’re pinning all your hopes on that company outperforming. A fund that invests in a spread of shares is easier for beginners and requires less research.

How do I pick a good investment fund?

There are thousands of funds available, so consider their objectives and whether the manager at the helm has a decent track record. Don’t overlook charges, as these can negatively impact returns.

Are ISAs a good place to start investing?

Yes, they are an excellent way for individuals to invest up to £20,000 in each tax year, safe in the knowledge that returns will be shielded from income and capital gains tax.

Can I lose money investing?

Yes, you can definitely lose money – but it’s possible to manage the risks by having a diversified portfolio and opting for lower-risk assets such as gilts.

How do I avoid investment scams?

Unfortunately, there are plenty of unscrupulous individuals looking to part people from their money. That’s why it’s vital to invest on regulated platforms and ensure you carry out thorough due diligence before handing over any money.

What’s the difference between saving and investing?

Investing offers the prospect of significantly higher rates of return than you’d get from putting your money away in the average savings account. However, it comes with more risks, whereas the Financial Services Compensation Scheme protects the first £85,000 you have put away should your provider go bust.

Final thoughts: start small, think long term

The best suggestion for anyone looking at how to invest in stocks and make money is to take the first step, no matter how small. 

Consider your financial needs, determine which asset classes will help you achieve these goals, and start setting aside some money. Setting up a Stocks & Shares ISA, for example, is quick and easy. Even if you can only spare £10 to £50 per month, it will soon add up, and your investment journey will be underway.