What is investing?

Investing means committing money with the expectation of a financial return in the future.

With normal savings, you’re simply adding cash to a ‘pot’ which you can then use when you’d like to spend it. Investing is different because you’re buying something with the expectation that you can sell it for a profit later, or that it will provide an ongoing income such as a dividend or rent payment.

When you invest there is a chance that you will get back less than you put in. However, it is possible to minimise the risk you take by building a diversified portfolio. Instead of putting all of your eggs in one basket, you can invest in lots of different types of assets at once - for example, the stock market, property or shares in a fund.

Investing gives you the opportunity to make a real rate of return, which is the annual profit earned on an investment adjusted for inflation.  

Example

Annual profit 6%

Inflation 2.5%

Real rate of return 6% minus 2.5% = 3.5%

Put another way, it is the indication of the actual purchasing power of a given amount of money over time. Inflation can reduce the value of your money, especially during periods of low interest rates.

By accepting a certain amount of risk, you can earn much greater returns over the long term.

You should only consider investing if you can leave the money invested for a minimum of five years. Early withdrawal could mean you get back less than you have invested.

Disclaimer

The information, money-saving tips, tools and techniques provided are for guidance purposes only and do not constitute financial advice.

The information, money-saving tips, tools and techniques provided are for guidance purposes only and do not constitute financial advice. Where we provide links to third-party websites we are not responsible for their content. It is therefore important you carry out your own independent research.

If you need financial advice you can locate an adviser on the Personal Finance Society website below.

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