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A Beginners Guide to Investing

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Whether it is saving for your retirement, pension or building wealth, investing when you’re self-employed should not be ignored. After all, taking responsibility for your finances and building your pension pot is all down to you.

If you are self-employed you know that your hard-earned cash is being utilised to its full potential.

But what I really love about being self-employed is that the sky is the limit. I have the possibility of earning unlimited income which I can convert into passive income and wealth accumulation.

That’s what makes investing a great step for anyone like me. It gives you the opportunity to make your money go even further! And who doesn’t want that?

If you’ve never invested before I know just the word ’investing’ can be daunting! So I’ve formulated this beginners guide to investing to help you get started!

What are Investments?

Being self-employed usually means that you sell or provide a service, which in turn provides you with your income.

An investment is something you put your money into, it does the work for you and then pays you a return on your money.

That means you need to be totally sure about where you invest your money before you part with your cash because depending on the investment your choose you may find yourself have fairly little control over its success or failure. 

I am sure you have heard the warnings:

“Investments can go up as well as down” 

“Capital at Risk”

That doesn’t mean you shouldn’t invest. It just means you should be sure you are comfortable with the money you are risking and you choose an investment that you suits the level of risk you are willing to take. There may be terms that affect when you can get your money back.

Why Invest

Determining the reason that motivates you to invest is an important step and your goals. Once you’re clear about why you want to invest, you’ll be clearer about what type of investment will suit you most.

For example, if the main reason you’d like to start investing is to help you save for retirement. It’s probably best to choose a long-term investment that will continually make you money that you add to your retirement pot.

Whereas if you would like to invest to generate some extra income that you can save for unexpected expenses in your business it would probably be best to choose a short-term investment. This way you’re more likely to get a lump sum of money in a quicker time frame and have the cash on deck when those pesky unexpected business costs come creeping up!

A Beginners Guide to Investing

Where Can You Invest Money

There are four main types of UK investments:

  1. Bonds
  2. Shares
  3. Property
  4. Cash

Here’s a quick overview of each type and some quick facts.

Bonds

A bond is a loan made to a corporate entity or government body looking to raise cash.  In return, the investor receives a fixed rate of return (interest or ‘coupon’ payments) over a specific period of time. At the end of the agreed term, the investor should receive their original capital back and the coupon payments cease.

The specific period of time that you need to invest your money will vary bond to bond, but they can be a great short-term investment with some terms being as little as 6 months.

Bonds can be a smart option for beginners looking to invest in the UK as the details of the loan and interest payments are set out clearly. That means they are generally perceived to be a less risky investment option.

That being said, like with any other type of investment, there are risks for you to consider such as:

  • Not being able to access your money until the end of the agreed term;
  • If you can access your capital during the bond term, it may not be worth what you initially invested;
  • Unless you invest in a fixed bond, your capital can be worth less than you put in at the end of the term.
  • In an increasingly unpredictable world, it can be difficult to make a reasonable estimate of what your capital will be worth particularly if the bond you are considering has a long term;
  • Corporations and even countries can go bust putting you at risk losing all your original capital.

Shares

Shares are sold publically on the stock exchange, allowing investors to buy a portion of a company. In return, the investor is entitled to a portion of the company’s profits – known as a dividend.

When you invest in shares you can make money in two ways:

  1. As the company grows your initial investment will become more valuable;
  2. With regular dividends paid to you.

In the UK you’ll find shares you can buy on two stock exchanges – the London Stock Exchange (LSEG) and Alternative Investment Market (AIM).

Investing in shares requires research to give you a deep understanding of the company you are buying shares in and the risks that are involved.

Shares are a great investment strategy but there are risks:

  • Companies can lose value or go bust meaning your capital can be at risk;
  • You are not guaranteed to receive dividends.

Stocks can be a good investment option whether you intend to make a short-term investment to sell your shares for a profit. Or if you intend to buy stocks to receive a regular income from your investment.

Even after doing your research you’re still may not be sure on which stocks to invest in. Don’t despair help is available, financial advisors can easily be found to give you advice.

And thanks to technology you can even receive advice and guidance from Robo advisers!

Property

When it comes to investing in property there are two main ways you can make money – through rental income and an increase in the property value.

There are a lot of options when it comes to investing in property including buy to let, commercial, residential and real estate investment trusts (REITs).

REITs are similar to shares but for real estate instead of companies. A group of investors put their money together to buy properties which are traded on the same exchange as shares. Helpful if you don’t have sufficient funds to put down on a property of your own.

Investing in property has grown in popularity in the UK over the recent decades but despite this, it does carry risks that you should be aware of:

  • Property prices and rents can go up as well as down;
  • Times when your property is vacant and you are not earning any rent;
  • Property maintenance costs and demands on your time for management. 

Cash

Putting your cash into a bank or building society is generally considered the safest way to invest your money. Depending on which bank you choose, funds of up to £85,000 may be protected by the Financial Services Compensation Scheme (FSCS) in the event the bank collapses.

Banks and building societies offer a plethora of savings accounts with different interest rates with vary according to the amount you want to deposit and accessibility.

Despite the relatively safe nature of this investment, with dwindling interest rates, alternative forms of investment have become more attractive to investors.

How to Start Investing

The first thing you will want to do before you begin investing your money anywhere is to take an honest and thorough look at your finances.

It’s important to determine how much money you can actually afford to invest. While the aim of investing is to build wealth and generate income, it isn’t risk-free.

You should remember that when investing there is the possibility that you could lose money. So never invest more than you can afford to lose.

It’s also worth noting depending what type of investment you’re making a huge sum of money isn’t necessary.

Ultimately it really is up to you how much or little you invest.

Take Action!

The final step is to take action and get investing!

Of course, before you get to this step please ensure you’ve done your research, you’re clear about your desired outcomes and you’re aware of the risks.

But with the right research, investing doesn’t have to be scary or for financial experts. It can be the perfect solution for you to make sure your money works as hard as you do!

Anita Forrest
About Anita Forrest

Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy. She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.