Investing In Stocks And Shares Should Not Tax You

IF INVESTING scares the pants off you, then our new series from investment specialist Philippa Gee, tells you everything you ever wanted to know about stocks and shares. In the first of seven articles, Philippa outlines the basic principles of investment.

The basics

YOU MAY be questioning why you should invest money at all, rather than putting it straight into a savings account when there is a chance that you would make a loss over time.

Well, fundamentally the aim is to ensure that you bank a profit in the future. A renowned study called the Barclays Equity-Gilt Study has shown that over a longer term – around three to five years minimum – investments in stocks and shares have given a better return than putting your money into a savings account. Yes, you take a risk, but the point of that is that you hope for a better return in the long run.

Fundamentally, investing is a means we can all use to ensure we aren’t dependent on the state or others in our dotage. But you have to understand the basics before you can shine some light on what’s widely perceived as a complicated and daunting area. 

Why invest?
Although it is often said that ‘the best things in life are free’ much of what we need costs money.  Think about your future and there are likely to be numerous events on the long-term horizon that are going to be expensive – a wedding, a new car, your retirement, or making provision for your dependents by saving for school and university fees. 

Squirreling a little away here and there is one strategy, but stuffing notes under the mattress or in a cash savings account for that matter can lead to a nasty shock when looking to make that future purchase. Inflation erodes the purchasing power of money over time and the modest returns from many savings accounts will not necessarily protect your money from the ravages of rising prices, let alone grow your spending power. 

Is investing for you? If so, where do you start?
With inflation meaning that putting money into a savings account is often not enough to generate the sums that you may need in the future, you should to consider what other options are available.  We’ll come onto some of the key factors influencing your actual investment decisions later on but first here’s a brief overview of the four main investment options – or ‘asset classes’ as they’re known in the trade.

1. Shares offer real growth potential – shares are probably the best known ‘asset class’ and also referred to as equities. They represent the ownership of part of the company that has issued them. 

2. Bonds – an IOU offers steady income stream – bonds represent a loan made to a company or government.  In return for your money the ‘borrower’, that is the company or government, typically agrees to pay a particular rate of interest and then commits to repaying the loan at the end of a stated period. 

3. Property - bricks & mortar beyond the home – for many people the family home is the most significant ‘investment’.  Focusing purely on residential property however, ignores the opportunity offered by commercial property, such as shopping malls.

4. Cash is king - in the short-term – Cash is the ‘asset class’ with the least associated risk and is useful for those investing for the short-term because it offers security and easy access. 

Get in shape before you start
Before you start investing it makes sense to give your broader finances a health-check. One of the most important things to consider is your exposure to high-interest debt, like credit cards and personal loans. In many cases the interest being paid on these outstrips the potential gains you’d make on any investments.  Often paying these debts off as quickly as possible should be the first priority.

Investments, investments everywhere – but which ones to pick?
There’s a wealth of opportunity out there for today’s investor and thousands of products offering access to the potential benefits of investment in financial assets.    But as we’ll see in the next Master-class it’s not just about picking one investment and diving straight in. Getting the balance right is likely to be a key determinant of investment success when it matters – over the medium and long-term. 

Philippa Gee is an investment specialist with indepdendent financial adviser (IFA) Torquil Clark.