Investing for the Inexperienced

Partners

Hotel Reservations

By:Brian Turner

The range of options for investing your money can be bewildering to the new investor. Obviously, I cannot provide investment advice particular to your circumstances, but I will try to advise you of a few basic investment options that may be available to you if you are looking to invest a lump sum.

Investment Options

High Interest Deposit Account

A bank account? Is that really an investment option?

Sure it is – something that really needs underlining is that if you’re looking to invest on the stock market, you really need to be looking to make long-term commitments.

What a High Interest Deposit Account offers is a short-term investment option, for example, if you’re looking to put a lump sum away for just a couple of years.

You’ll find the interest is usually taxable – but you can also benefit from much higher interest rates than normal savings account at the bank.

And, your money is also safe – whatever the fluctuations of the stock markets, your interest rate should be guaranteed.

Tax Free Savings accounts

Another financial product a bank can usually offer, is a tax-free savings scheme.

Certainly that’s true here in the UK, where the ISA – Investment Savings Account – is widely available.

Take note, though – there are a couple of important points to be aware of.

The first is that ISA’s come in at least two basic forms – often referred to as Mini and Maxi ISA’s.

The Mini ISA is effectively a form of high interest savings – you have a guaranteed savings rate, and again, it’s pretty high relative to current accounts. So a mini-ISA can make a good short-term investment.

The Maxi ISA is a direct investment in stocks and shares – so you’ll need to be in this for the longer-term.

That’s partly because your interest will only grow with the stocks themselves. But less obviously, when you invest you’ll likely find yourself immediately hit by a management fee – for example, 4% of your deposit. So your stocks will need to earn 4% value before you get back to where you started from.

The second point to be aware of with ISA’s and tax-free savings is limitations – with an ISA you can only invest a limited amount of money in them each year. So this isn’t really something you can use for larger lump sums.

Stocks and Shares

Stocks and shares are the mainstay of market trading – you buy into the equity of growing companies, on the grounds that as they continue to grow and perform well, their revenues increase, their company value increases, and therefore not only does the stock you hold grow in value – but you can also earn dividends – earnings paid directly to shareholders.

The problem with the equities markets, though, is one of risk. It is up to the individual investor to determine the level of risk that they feel comfortable with taking on board, and proceeding accordingly.

For example, investing a lump sum into a single company stock is extremely risky – it’s all eggs in one basket. Lessen the risk by investing in multiple stocks and also try to cover different market sectors – for example, financial services stocks, energy stocks, mining, airlines, retail, etc.

There are certain options to help make those decisions for you – such as Mutual Funds and Exchange Traded Funds. These will simply take your cash and spread it around a diverse range of stocks for you.

Of course, you can take a hands on-approach yourself, and try to choose your own stocks.

However, the big problem here is that in doing so, you take on all the risks, and you not be in apposition to properly ascertain what the actual risks you are taking. If you must do it yourself, at least use one of the many available “virtual investor” options that brokerages online commonly offer, which allow you to practice investing – and get used to the system – without actually risking any money.

Futures Trading

Futures trading is effectively speculating on the future value of goods - commonly commodities and currencies.

Commodity markets speculate on the future values of oil, metals, and agricultural products, for example.

Foreign exchange markets (Forex) speculate on the future value of currencies.

The point to underline here is that it's a zero sum game. With stocks, they can all theoretically grow in value over time and all investors win. With futures trading, you only make a gain by someone else making a loss.

Futures markets are also notoriously volatile, and definitely not for the inexperienced investor.

That doesn’t mean to say that funds out there who speculate with futures trading are bad – simply more risky. As with all risk, you have to determine whether the losses you could occur are acceptable, and worth putting against the gains you can make.

Conclusion

Overall, if you have a lump sum, where you invest it depends upon how long you wish to invest it for.

High interest deposit accounts at the bank are about your best short term option – mix them with ISA’s and similar when looking to invest for just a couple of years.

However, if you can afford to invest for longer, then there are funds and fund management schemes out there that can help take the strain of decision making for you, and spread the risks involved much more widely and thinly.

Of course, if you’re feeling adventurous, you can always invest directly, and create a portfolio based on equities investments, commodities and currency trading. While the rewards are potentially greater – so are the losses if it goes wrong, and you absolutely have to be prepared to accept that if you go this way.

Anyway, I can only hope this helps a bit, and wish you every success with your investments.

Brian Turner is an advisor with Central Consultants. He is also the editor of Finance Markets and offers free advice on their investment forums.

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