What is investing?

Investing is best defined as a way to increase the value of your money over the longer-term – in return for taking a calculated risk.

It involves buying assets that you anticipate will increase in value over time. They can include actual properties, shares in companies or bonds issued by governments.

Depending on the assets chosen, investors may benefit from growth in the capital that they’ve committed, as well as possibly a regular income.

Different ways to invest

There are numerous ways of investing. The route that best suits you will depend on your longer term goals and attitude to risk. We’ll come on to that a bit later.

You can invest in individual assets. For example, these can include shares in companies that are listed on the London Stock Exchange.

It’s also possible to put your money into so-called collective investments. These are pooled funds that buy assets after combining money from numerous investors.

Why do people invest?

In simple terms, people invest to make a profit. Their goal is for the value of the investment bought to grow substantially over the longer-term.

Of course, everyone has different needs for their money. Many people are looking to build up a substantial retirement nest egg with which to fund their later years.

Others need to have a certain amount set aside to put their children through university or have dreams of clearing the mortgage as early as possible.

How it differs from saving?

Saving and investing are not the same. While they have similar end goals – putting money aside that can be used in the future – they work in very different ways.

What is saving?

Let’s take saving first. Most of us will have been familiar with this concept since we were young children and started putting money into savings accounts.

In exchange for committing this money with a bank or building society, they will pay you a rate of interest. This means the value of your savings should gradually grow over time.

It’s also pretty safe.

As long as you put your money with a UK-authorised bank or building society, your money will be protected by the Financial Services Compensation Scheme – up to £85,000 per person, per bank – should that institution fail.

What is investing?

Investing is riskier than saving but can offer significantly higher rates of return. This means the value of your holding has the potential to grow more than cash in bank accounts.

You make an investment in an individual asset or fund in the hope that it will increase in value. But there are no guarantees this will be the case.

That’s why it’s vital not to invest more than you can afford to lose – and ensure you thoroughly understand where you’re putting your money before making the commitment.

When to save and when to invest?

Most people should consider saving AND investing. The key is knowing when is appropriate. The first point is you need to have some short-term savings that are easily accessible.

This is for covering unexpected emergencies. For example, footing the bill if the boiler suddenly packs up or being told your car needs work to get through the MOT.

Investing is for longer-term needs once you have your emergency pot squirreled away. It’s for your future and the longer your investment horizon the better your options.

Be wary of inflation

Investing is also a way to – hopefully – reduce the impact of inflation, which is the term used to describe how prices have risen.

Now, inflation is best described as a measure of how much prices of goods and services have gone up over time, expressed as a percentage.

Goods includes everything from a packet of crisps to a car. Services, meanwhile, could be tickets to the theatre or having your hair cut.

How does inflation work?

Take the example of a toy that had cost £10. If inflation is running at 4%, the new cost of the toy would be £10.40, representing a rise of 40p.

If inflation keeps rising – but the rate of interest on your savings account isn’t increasing by the same amount – then the spending power of your money is falling.

This erosion means the amount your money can buy will reduce each year. If you let that situation continue indefinitely it can seriously impact your financial health.

This is step 1 of 5 in our “5 steps to investing” — continue to step 2: The two types of investments you need to know about

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