A Guide To Investing in UK

What is investing?

Investing is the use of resources, not for consumption (that is buying a good or service to use/ consume now), but for the potential to increase the value of the resources, usually capital/ money. The expectation from investing is to generate either an income from the money, to produce a capital return on the money (that is grow the amount), or a combination of these two.

So, for example you might buy a second home, not to live in and “consume” now, but to forgo the consumption and look to gain income from the property, by way of a rental. Or to look to see the value of the property increase, resulting in a capital gain. Or, hopefully, for both of these to occur.

Top Investment Takeaways

  • In today’s financial markets, the individual retail investor has a magnitude of investing options, from individual stocks, ETFs, real estate, corporate bonds and alternative investments.
  • Socially responsible investing is becoming increasingly popular, with the trend for further growth in the future
  • The UK offers a number of tax efficient ways to invest, including ISAs and SIPS.
  • There are a number of different investing approaches and styles, which you choose will depend on your personal objectives and risk tolerance.
  • A key question to answer will be to whether you want to manage your own funds, or pay that bit extra to have funds managed for you.

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What is the difference between investing and trading?

There are several differences between investing and trading and these can be categorised by:

  • Time Frame
  • Flexibility
  • Leverage
  • Returns

Time Frame – generally speaking, investing a scene is a longer-term activity, maybe putting your money to work for multiple months, for years or even decades. Trading is seen as a short-term activity, which can be four days or weeks, or even for a matter just minutes.

Flexibility – with Trading, there is usually the option to be long or short, this means that you can profit from a financial market instrument going up in price and going down in price. Traditionally, with investing you would look to be long only, meaning you would buy the asset, like a stock, look for it to go up in price and then sell it to make a profit. However, in modern markets there are instruments, ETFs for example, whereby it is possible to profit from the underlying price of the asset going down.

Leverage – when investing, there is usually no leverage, meaning that you would only lose all of your investment if the price of the asset goes to zero. With trading, there is often leverage involved (although not necessarily). This means there are potentially higher rewards, but also possibly much larger losses.

Returns – when you invest, you may be looking for capital growth, or you might be looking for an income from the asset, or a combination of the two. With trading however, the main aim is to profit from short-term increases in capital, rather than driving any income.

History of Investing

Here we will have a very brief look at the history of investing. Investing, the foregoing of current consumption for future consumption has occurred across the ages. Even in prehistory we have examples of ancient man foregoing consumption of food to save for the future, when times may not be so fruitful. However, the more modern form of investing as we know it today, can we trace back to the 15th century and the “nostro” accounting book of the Medici banking family, then in the 18th century, when public exchanges between investors and those looking for investment were formed.

The industrial revolutions of the 18th and 19th centuries saw a growth in prosperity for many and an excess of income and revenue, which could be forgone as consumption and therefore saved and invested. It is at this time too, that major investment banks came to begin to dominate the word of investing.

Fast forward to the 20th century, and there was an explosion on different investing models and theories, such as portfolio theory. And after the Second World War, there was also a growth in the different types of investing products and vehicles available within the banking and finance sector, along with the general investing public. In addition, at the end of the 20th century, the growth in technology and the advent of the internet made these new products even more accessible to the wider investing public.

Now, into the early part of the 21st century we have seen further “democratisation” of investing with further technology improvements. But this has gone hand in hand with the popping of the “dot.com” bubble at the very start of the new millennium and in 2007-2009 the Global Financial Crisis.  And even more recently, during the COVID-19 pandemic, there has been an influx of new investors, attracted by the Reddit/ Game Stop frenzy and by the ease of trading with new free and discounted investing apps.

What are good investments?

There are many different ways in which to invest, but what makes a “good” investment? Well, that will depend on your goals, your tolerance to risk and which asset classes you are comfortable investing in. In the following section we will look at

  • the different asset classes you can invest in
  • Socially Responsible/ Environmental, Social and Governance investing
  • tax efficient ways to invest in the UK
  • the different ways that you can invest
  • different types of investing styles

What can I invest in?

There are many different asset classes in which to invest your money. These include, but are not limited to:

  • Individual Stocks
  • Index Funds
  • Exchange-Traded Funds (ETFs)
  • Mutual Funds
  • Unit Trusts
  • Investment Trusts
  • Real Estate
  • Alternative investments
  • Commodities
  • Cryptocurrencies
  • Government Bonds
  • Corporate Bonds
  • Savings Bonds
  • Savings Accounts

Individual stock investments

One of the most common forms of investing is to invest directly into an individual company, usually listed on the stock exchange. Buying a stock or share means you have a partial ownership of the company that you are buying. This means that if the stock price goes up, because the company is doing well and becoming more profitable, then you will make a capital gain on the investment. In addition, the company may pay a dividend, which is effectively a share of the profits made, usually pay that on an annual basis. So as an owner of a share, you could also receive an annual income, depending on the number of shares your own and if the company is making strong profits and distributing these profits in the form of the dividend.

Stock investing has become even more popular in the 21st-century with the advent of online investing, which makes it very easy for individuals to do their own research on individual companies and also to then buy and sell stocks. Moreover, rather than being limited to owning stocks in the country that you live in, more and more investors are investing in companies from other countries, most notably in the more dominant global corporate, such as Amazon, Apple and Microsoft.

Investing in Index Funds

An index fund is an investment product that looks to follow an index. An index is a group of shares, a weighted average of a number of stocks, from a section of a stock market. It could be that the index reflects the health of a country, initial economy and the stock market of that country. An example would be the FTSE 100, which represents the value of the largest 100 stocks quoted on the London Stock Exchange.

However, index funds are not only a reflection of a national economy, or a geographical area. There are also sector indices index funds, which may track an individual sector, such as the banking or retail sectors. In addition, there are index funds following asset classes, such as commodities, where the investor would have exposure to a number of different commodities.

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ETF investments (Exchange Traded Funds)

An Exchange Traded Fund (ETF) is very similar to an index fund, in that it follows an index, a commodity, a sector or some other assets. An ETF can be bought and sold on a stock exchange just like a normal share. ETFs are structured products that can reflect the price of an individual share or commodity, or a wide diversity of different assets.

As the name implies, an ETF is traded on an exchange just like individual stocks and like shares prices, the price of the ETF goes up and down throughout the day. ETFs are different to index funds or mutual friends in that they are traded on an exchange, they have fluctuating prices throughout the day and are usually seen as more liquid and cost-effective than index or mutual funds.

Mutual Funds

A mutual fund is an investment vehicle managed by professional investment managers, who invest and allocate the assets of the fund in order to meet the objectives of the fund. Typically, the objective for the fund would either to be to produce capital gains, to produce a steady, regular income, or potentially for a combination of these two objectives. Mutual funds may invest in individual stocks, commodities, bonds or various other financial market instruments and assets. The mutual fund will produce a prospectus, in which it would state its investment goals and structure

Mutual funds are made up of a pool of money from many different individual investors, allowing for the individuals to have exposure to a broad portfolio of financial market assets, which are being professionally managed by the mutual fund manager. Each investor in the fund has a proportional stake in the fund and therefore makes gains or losses in line with the performance of the fund. The value of the mutual fund at any time is derived by the total performance of the underlying assets in which the fund has invested.

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Investing in Asia Pacific Funds

As a UK investor, Asia Pacific funds and ETFs are an interesting investment proposition. The Asia Pacific area is a large and economically diverse region that offers a number of opportunities for investors. One way to gain exposure to the Asia Pacific area is through funds or Exchange Traded Funds (ETFs) that focus on the region.

These funds can provide access to a broad range of companies, allowing investors to benefit from the growth of the Asia Pacific economy. Read more about investing in Asia Pacific Funds.

Another way to invest in Asia Pacific is through individual stocks. This approach allows investors to target specific companies that they believe are well-positioned to benefit from the region’s growth. However, it also carries more risk than investing in a fund, as the performance of individual stocks can be more volatile.

Regardless of the approach taken, Asia Pacific presents a number of compelling investment opportunities for those looking to add global diversity to their portfolio.

Unit Trusts

A unit trust is a particular type of mutual fund, but difference from a mutual fund in that a unit trust is unincorporated, with the unit trust established under a trust deed. The individual investor is in principle a beneficiary of this trust. As with mutual funds, unit trusts are run by fund managers, with trustees in place to oversee that the fund follows its aims and objectives.

Investment Trusts

An investment trust in the UK is similar to mutual funds and unit trusts, but an investment trust is set up as an actual company. Whereas in mutual funds and unit trust the investor is putting their money into a pool, which is being managed by a fund manager, in the case of an investment trust, the investor actually buys a share in the company that is running the investment trust. Effectively, when you buy a share in the investment trust, you are buying a share of the underlying portfolio of the investment trust. But to be clear, with an investment trust you are buying an actual share in a company, rather than investing in a pool of funds.

Invest in Real Estate

Investing in real estate has become increasingly popular for individual investors in the 21st-century. For many individuals, the largest investment they have is their own home. But for the modern real estate investor there are lots of other ways of investing in real estate, that does not require directly owning actual, physical properties.

REITs are real estate investment trusts and use the investments in the corporation or trust to buy, own and sell properties in order to produce an income, and also to create a capital gain. In the US, a REIT must distribute 90% of its profits as dividends to its shareholders, this way avoiding paying corporate income tax. REITs are usually viewed as investment vehicles for investors whose main financial goal is regular income, but with the added bonus of the potential for capital gains.

Real estate mutual funds is simply mutual funds whose primary investment is in REITs and real estate companies. This means that smaller investors can have exposure to the real estate market with a smaller initial capital investment.

Alternative investments

Quite simply, an alternative investment is any financial instrument that does not come under the usual categories for investing, such as shares, bonds and money market funds. Alternative investment would include financial assets such as art, antiques, hedge funds, derivative investing, with real estate also often seen as an alternative investment.

But please be aware, that many alternative investments are seen as higher risk, usually require a larger initial investment amount, and are often unregulated (or have fewer regulatory requirements).

Commodities

Commodities are simply raw materials or primary products. They usually split into two categories, soft and hard commodities. Soft commodities are agricultural or livestock products, so for example coffee, soybeans, wheat and corn. Hard commodities are resources that are usually extracted or mined, such as oil and gold.

Commodities are traded on commodity markets, which are the physical or cash markets, whereby the participants buy and sell physical commodities for delivery immediately. There are also derivative markets for commodities, such as futures, options and forwards, where the physical market is the underlying asset. This allows for investment in commodities without having to actually own the underlying physical commodity itself.

One of the most common ways for an individual investor to invest in commodities is via a mutual funds that is primarily investing directly in commodities or in commodity companies. The other simple way for the retail investor to invest in commodities is via a commodity ETF.

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Investing in Cryptocurrencies

Crypto Derivative trading is not available for retail clients in the UK

Cryptocurrencies or a digital or virtual currency, which are secured by cryptography in a decentralised network using Blockchain technology. Cryptocurrencies have moved from being an internet “craze” earlier in the 21st century to now becoming far more mainstream.

There are a number of routes to be able to invest in cryptocurrencies for the individual investor. One of the first things to decide is which cryptocurrency to invest in, do your research and be aware that no matter which cryptocurrency you choose, there is a high amount of price volatility, this is not the same as investing in blue chip stocks. Once you have decided which crypto you want to buy, you then will need to go to a cryptocurrency exchange, as you cannot simply buy cryptocurrencies via a bank or a traditional financial institution. Some of the larger exchanges on offer are eToro, Coinbase and Binance. You will also need a wallet to store your crypto currency.

An alternative way to have exposure to cryptocurrencies is to invest in a crypto currency fund. Although there are regulations which means these are not mainstream, there are funds and ETFs dedicated to cryptocurrencies.

You can also invest in cryptocurrencies via CFD’s at most forex brokers. Read reviews and compare the cryptocurrency offerings of forex brokers here.

Please remember, that although cryptocurrencies have become far more mainstream as we have moved into the 2020s, they are still very volatile and highly speculative investments.

Government Bonds (and Municipal Bonds)

Government and municipal bonds are seen as low risk financial instruments, but that yield a lower overall return then more risky assets like stocks. Bonds are effectively a loan to the bond issuer, in this case the government or state governments or local municipalities, with a promise to pay back that loan at a specific time in the future, with interest payments being made in the interim.

In the UK, government bonds also known as gilts (as historically the common bond certificate was gilt-edged) with the easiest way to invest in these via an online investing account.

There is an option to buy new issues of Gilts directly from the UK Government, but you would then need to register and apply through Computershare Investor Services, an agent for the UK Government. Similarly, you can buy US Treasury bonds direct from the US government via their website TreasuryDirect.

Another simple way of investing in UK gilts, or indeed any global government bonds is by investing in a bond mutual fund, unit trust, investment trust or an ETF.

Municipal bonds are similar to government bonds but are issued by state governments or local municipalities. They are generally government-sponsored but often seen as having a slightly higher risk. Again, probably the simplest way to invest in municipal bonds is through mutual funds and ETFs.

Corporate Bonds

Corporate bonds are the same as government bonds, but the issuing entity is a company, so effectively you are loaning money to the issuing corporate. Again, as with government bonds this loan will be paid back at a specified date in the future, with regular interest paid until that date.

Once more, it is possible to buy and sell corporate bonds directly on an exchange, if they are exchange traded, similarly as you would buy and sell company stocks. However, as with government bonds above, a simple way to gain exposure to the corporate bond market is via mutual funds and ETFs

Savings Bonds

Saving bonds are similar to savings accounts, where you can deposit a lump sum with a bank, building society or even the government and then receive interest on that capital investment. Usually, you are required to lock up your money for a set period of time and there is usually a minimum investment amount. Effectively, you are giving the fixed term loan to the provider for a known return on your investment.

Generally speaking, the deposit period can be anywhere between six months and up to 5 years. The longer you commit to locking up your capital, usually the better interest rate you will get, but if interest rates rise in the interim, then you are locked in at the fixed interest rate. If you do need to access your saving/ investment at shorter notice, then usually there will be a penalty and you will forgo some of the interest payment. A simple form of saving bond in the UK are National Savings and Investment (NS&I) bonds. These are issued by the government and require a minimum deposit of £500.

Savings Accounts

A saving account is simply an account that you put your money/investment into and earns interest. The savings accounts are usually offered by banks and in the UK by building societies, offering different interest rates depending on ease of access or notice periods for access to funds. Some saving accounts offered fixed interest rates, with some offering their real interest rates, depending on the underlying central bank rate.

Socially responsible/ Environmental, Social and Governance investing

Socially responsible investments (SRI) and environmental, social and governance (ESG) investing are huge trends in financial market investing in the 21st-century. Quite simply, these investing practices do not simply have a single objective of financial rewards as their main goal but combine the aim of financial returns with the objective of creating social change.

Environmental, social and governance (ESG) investing is a strategy where you can put your money to work with companies that are looking to make the world a better place. With ESG investing, companies are independently rated according to environmental, social and corporate governance factors.

  • Environment. What impact does the company have on the environment? For example, sustainability efforts and the companies carbon footprint.
  • Social. Does the company look to improve its social influence, within the broader community as well as within the company? Social factors would include racial and gender equality and diversity.
  • Governance. Does the board and management of the company look to drive positive change?

See our more in-depth article on socially responsible and ESG investing, and also our look at SRI and ESG investing trends.

Tax efficient ways to invest

There are several tax efficient ways to invest in the UK. These include but are not limited to ISAs (Individual Savings Account) and SIPPs (Self-Invested Personal Pension).

ISAs (Individual Savings Account)

An Individual Savings Account, shortened to ISA, is a UK investment vehicle. An ISA works the same way as any normal savings account, but in the UK, it means that you do not pay any income tax or capital gains tax on any proceeds from the savings account. ISAs area broken down into these different subcategories of ISAs.

  • Cash ISA/ Junior ISA* are for only saving cash.
  • Stocks and Shares ISA/ Junior Stocks and Shares ISA* are for buying shares and funds.
  • An Innovative Finance ISA is for investments such as peer-to-peer lending
  • A Lifetime ISA is for saving for your retirement or first home. It can be used to hold cash, shares, funds and other investments (but can only open one if you’re between 18 and 39).

*The Junior part of the first two above indicates that the ISA can be taken out on behalf of a child.

SIPP (Self-Invested Personal Pension)

A Self-Invested Personal Pension (or SIPP) is a tax efficient way of saving for retirement in the UK. The saver/ investor can decide where to invest and how much to invest and when. A SIPP has all the same tax advantages as a normal pension, with relief of up to 45% on personal contributions.

How to Invest

There are various approaches to investing, and the choice about which way to go about investing is very individual. It will depend on your own personal objectives, your risk tolerance, your knowledge about financial markets and investing products, and the time that you have available to dedicate to your investing decisions. Here we will look at some of the options open to the individual investor

Personal, DIY investing

Investing for yourself is very much a personal choice, with many individuals wanting to have full control of their own savings, investments, and finances. If you have the time and knowledge to be able to do this, then this is a very empowering way of managing investments. However, many individuals do not have the time to dedicate to overseeing their investments on a regular basis, do not have details, technical knowledge about investments in the financial markets world to be able to make well-informed decisions on how best to invest.

Another advantage though of investing for yourself is that in the modern world of online brokers, investing costs can be very low, particularly when compared to the management costs for using a professional investment manager. Etoro is a broker that covers a large amount of assets discussed here. Read eToro review.

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68% of retail CFD accounts lose money.
You should consider whether you can afford to take the high risk of losing your money.

Professional/ managed investing

The world financial markets and investing is always changing and requires a great deal of time, information and knowledge to fully understand. For that reason, there has been a huge industry that has grown over the past 100 years or more that deals with managing the Investments and wealth of individuals. Professional fund managers are more expensive than managing your own investments, but this premium means that you are able to delegate the investment decisions, the research and the investment process to an expert. This buys a lot of peace of mind, particularly when we are looking at large sums of money.

Robo-Advisor investing

A quickly growing area in the world of financial markets investing is the robo-advisor. These are investment companies that are based upon artificial intelligence and algorithms, whereby key information about the individual investor, their goals and risk profile produce automated investment advice and recommendations. This means that robo-advisors are very cost-effective, but still allow the individual investor to handover responsibility for their investment selections.

Investing Styles

There are various different investing approaches, with every individual having a different idea about what they want to achieve from their investments and their risk tolerance. Therefore, the right investing style for one individual may not be correct for another, whilst your investing style may also change over time as your individual situation changes.

Growth investing

Growth investing is exactly what is says on the tin, investing in companies that have, or will potentially have high growth. The companies often already have higher valuations, as measured by valuation ratios (such as Price-Earnings, P/E).

Value investing

Value investing can be viewed as the opposite of growth investing. The value investor looks for companies that are undervalued, that are out of favour and that have low P/E ratios. Usually, these companies will have higher dividend yields than growth companies.

Active investing

Active investing is when a fund manager will aim to “beat the market”. By actively managing an investment portfolio, the active investor will actively buy and sell assets in order to improve upon a “buy and hold” strategy. However, the costs of buying and selling can often outweigh the benefits.

Passive investing

Passive investing is a “buy and hold” strategy, a passive approach whereby the portfolio manager would simply buy maybe an index tracker, an ETF that follows an index. This is with the belief that it is not possible to consistently “beat the market”.

What are the best investments for you?

The best investment for you will depend on what your financial goals are and your tolerance for risk. With so many different financial market assets and investing options you should attempt to ensure that your portfolio is diversified across multiple asset classes and sectors.

Here are some factors that you should consider when making investment decisions:

  • Returns 
  • Risk 
  • Investment Duration
  • Accessibility 
  • Exit Strategy 
  • Income or Growth 

Returns

What are you looking to achieve from your investment in respect to the profit, the gain? Are you looking for a high return, which would likely come with a higher risk, or are you looking for slow, steady growth, with usually less risk?

Remember, nothing in financial markets is guaranteed, there are no “sure thing”.

Risk

Going hand in hand with returns is risk. The more risk you are willing to take, the higher your potential rewards will be. But also, the higher your possible losses too. If you are risk adverse and do want some guarantees, then don’t expect any significantly high returns.

Make sure you have a clear understanding of how much risk is attached to your investment. Even seemingly “risk free” assets such as binds have the risk of a default. This means that issuer does not have the ability to pay your coupon payments, or possibly even be able to repay the full principal.

Investment Duration

How long do you plan to keep hold of your investments? Can you tie up the funds for the long- or intermediate-term, or do you need access to the funds in the shorter-term? Depending on your investment goals and how long you can invest funds for, your choices on what to invest in will be different.

Accessibility

In the modern era, most asset classes are very accessible for the retail investor, once you have decided upon a suitable broker that provides all the markets that you wish to trade. Then it is usually very easy to invest once you have opened and funded an account. Assets such as shares, ETFs, and mutual funds can easily be invested in the UK.

But some asset classes such as corporate bonds and international government securities and some overseas stocks maybe be more difficult to invest in.  

Exit Strategy

Similar to accessibility is the need for an exit strategy. As highlighted above with accessibility, some financial markets instruments and investments are easier to invest in and liquidate easier than others. If you might need funds quickly, then your investments should reflect this. Always have an exit strategy in place. If you feel you may need to liquidate your investments at any time, you’ll be best to invest in liquid stocks and ETFs. However, fixed-rate bonds usually have your investment locked up for a set period of time.

Income or Growth

Some investors are looking for the ability to earn regular income, while others are looking for long-term growth. Different asset classes and financial instruments are tailored to deliver income or growth. Critically, your chosen investments and asset classes should align with your broader financial objectives.

Next steps

In this article we have tried to introduce some of the basic concepts of investing, alongside questions any investor should be asking themselves regarding their approach to investing. We have more detailed articles on the above topics, and also a whole section on the more volatile world of short-term investing, which is in fact trading.

We trust all your investing goes well.