The world of investment offers so many opportunities for those looking to grow their savings, but the mass of complicated terminology and industry jargon can be intimidating for newcomers.
That’s why Trustnet is launching a new series to break down the investment process so that first-timers can invest with confidence.
We’ll be going step-by-step though the finance lingo so that the investment universe doesn’t seem quite so alien, but first things first – why should you invest?
When you invest your money you put it at risk meaning there is the potential to lose it. This is the last thing anyone wants to do with the money they’ve earned, but it is always worth remembering that it is a possibility.
Of course, the reason we do it is because investments can go up in value and often by significantly more than by putting it away in a bank account, where it is safe and sound but unlikely to grow much.
What you might not realise is that money held in a savings account is probably losing you money over time because of inflation.
Inflation is how we measure the price of everyday living and it goes up almost every year.
An independent government branch called the Office for National Statistics (ONS) monitors the price of a basket of everyday items across the UK, from bread and milk to clothing and fuel, to work out how much costs are changing over time.
The Bank of England (BoE) – the UK’s central bank – aims to keep price rises at 2% every year by using financial options available to it. This means that any cash you’re holding onto will be worth 2% less than it did 12 months ago if it earned nothing at all.
Since the pandemic and war in Ukraine, inflation in the UK is at its highest rate in more than 40 years – from September, the cost of living is 10.1% higher than it was this time last year and the BoE expects it to rise even further to 11% the following month.
To put that into context, if you sat on £1,000 worth of cash a year ago that could buy you, for example, £1,000 worth of bread, you would now only be able to afford £900 worth of bread due to the rate of inflation.
The same amount of money would be there, but it would have lost ‘purchasing power’ now that you can’t buy as much with it.
Most bank accounts will pay you interest on any money you put into them, which means you will earn back a percentage of the money you keep saved in that account.
However, interest rates are rarely higher than the rate at which prices are rising, so your money will still lose purchasing power regardless.
For example, interest rates are currently set at an unusually high 2.25% but inflation is more than four times higher.
By leaving your cash sat in a bank account, how much you can buy with your savings will drastically diminish over time as the cost of living becomes gradually more expensive.
Alternatively, you can aim to grow your savings by more than the rates offered by banks when you invest.
Here, you’re aiming to make a higher return on that initial investment by either putting cash in bonds (loans to companies or governments), stocks (shares in companies), or alternatives (which is a wide range including things like gold and property).
There are many things you can invest your money in to make a return and we’ll be breaking down the main asset types in our next segment.