What is investing?

Investing has the potential to give you strong returns over the long-term and it's easy to start once you get the hang of the basics. We put together this easy-read guide to help.

In just a few minutes, you'll discover:

• What is an investment
• How risk can give you the edge
• How to get the experts to do all the hard work for you
• Start small and add small amounts over time
• Understanding your annual tax allowance

Over the long term, investing can be a win-win for everyone who gets involved. Here's what you need to know. 

Think of a large company, like Apple, Amazon or Microsoft. Investors can buy tiny bits of these companies, called shares. If the company does well, by growing and making profits, the value of these shares can go up. If it does poorly, by making a loss, they can go down.

You can invest in all kinds of things, shares, property, government bonds or even gold. These investments can be bought and sold financial markets, like the UK stock markets. 

You could make a profit by investing over the long term. But there are no guarantees, the value of your investments can always fall as well as rise - so you could get back less than you've put in.

It's smart to save up enough money to cover any unexpected expenses, so you're not dipping into your investments at a time when their value may have dropped because of market conditions. Investments are considered to be longer term choices due to the risk involved.

As with many things in life, the more risk you take, the bigger your potential reward, but also the bigger your potential loss. 

Likewise, the less risk you take, the smaller your potential reward, and the smaller your potential loss.

Savings are where most people start, putting any spare cash to one side to build up a short-term safety fund in case of emergency. This money is often held in deposit accounts in banks or building societies, where the rate of interest will be variable or fixed. Penalties might apply if money is withdrawn before the end of the period. The rate of interest paid on money held in deposit accounts tends to be relatively low but the amount of cash you have shouldn’t fall in value. Remember though, that inflation reduces the future spending power of money, so if the interest you earn doesn't keep pace with inflation, the value of your money can decrease in real terms.

Investments are medium to long term investments of five to ten years, with varying amounts of risk. Investing is about putting money away either as a lump sum or regularly, providing it with the opportunity to grow in value over the long term. There is a wide choice of investment types each with its own pros and cons. For example, investing in riskier investments, such as the shares of companies in less developed markets, means that there could be more bumps along the way, although there is the potential for higher returns. Investment charges can also affect the growth potential, so this is something else to take into account when choosing where to invest.

Remember the value of investments can go down as well as up and you may get back less then was invested.

You can manage risk to help your money work harder. For example, putting your money into lots of different investments will spread - or diversify - your risk. That way you're not relying on the performance of just one, which could suddenly fall in value. 

Another good way to manage risk is to invest for the long term. This works for things like a house deposit, university fees for your children, or your pension. If your investments for these drop in the short term, you'll be less likely to have to panic sell before they could rise in value again. 

You can also choose to invest smaller amounts monthly which can help smooth out the ups and downs of the market. 

Taking risks can sound scary, but it's the reason you could get higher returns. So it can be a good thing, if it's carefully managed. 

Just like the dentist looks after your teeth, professional fund managers can look after your money. They pick and choose your investments, so you don't have to. 

Fund managers study for qualifications from the Chartered Financial Analyst Society. This means they're trained to manage money. They must also must meet industry standards from the Financial Conduct Authority (FCA) - the regulatory body in the UK which aims to make markets work well for individuals, businesses and the economy. 

A fund is like a shopping basket filled with different investments - like global companies, government bonds, commercial property or commodities like gold. They can be a sensible way to manage your risk. 

Funds make it quick to start investing, even if you don't have a much experience yourself. You can also get started with a small amount of money. 

You might think investing is expensive and only for people who are already wealthy. But this isn't the case. 

Nearly everyone has enough to start investing, you can start from as little as £1 a month.

Making small monthly top-ups can work to your advantage. It's affordable, it gets you into the habit of investing, and it helps spread your risk. 

For example, if a company's shares fall to a lower price than usual, when you make your monthly investment you'll snap them up at a lower price, bringing down your average cost to buy them. It's called pound cost averaging and can be less stressful than trying to find the best time to buy like a professional investor. 

Of course, whether you put in little and often, or invest bigger lumps sums depends on your situation. You may have money from a work bonus or inheritance you'd like to invest right away. 

Whatever you choose, make sure you shelter some of money by using tax-efficient investments. 

Do you want to hold onto as much of your money as possible? Tax-efficient accounts like a stocks and shares ISA or a pension could be good for you. 

Remember, tax benefits are subject to change and depend on your personal circumstances. 

Stocks and shares ISAs

Stocks and shares ISAs work like cash ISAs when it comes to tax benefits, except they hold investments instead of cash. Any potential profits in these ISAs, like dividends, will be free of UK income tax and Capital Gains Tax. 

A stocks and shares ISA counts towards your annual ISA allowance, which is £20,000 for the tax year 2024/2025. With Aviva you can start an ISA from just £25 a month. 

Pensions

A pension helps you put money away for retirement and, like a stocks and shares ISA, the money you put into it is invested. You can’t access money paid into a pension before you reach 55 (57 from 6 April 2028 unless you have a protected pension age).

Pensions come with a standard annual allowance, which covers all contributions to your pensions in a tax year, of £60,000. However, any personal contributions cannot exceed your earnings in the tax year you make the contribution. The Government also adds an extra 20% to what you pay in (if you’re a higher or additional-rate taxpayer, you can claim back even more) – it’s like a top-up.

You can carry your unused annual allowances from the past three tax years into the current one, which means you could pay in more than your annual allowance. This is known as pension carry-forward – you can only do this if you’ve used up your current annual allowance first.

There's a tapered annual allowance for those with earnings over £200,000, not including pension contributions. If this figure increases to above £260,000 when contributions are added, then their standard annual allowance reduces by £1 for every £2 over this amount, to a minimum of £10,000.

If you have flexibly accessed your pension benefits you will become subject to the money purchase annual allowance of £10,000. This means that you cannot contribute more than £10,000 into a defined contribution scheme in a tax year.

There’s a lot to take in when it comes to pensions and their allowances, and this is just an overview, so you can find more information and detail by reading what pension tax relief is all about.

Once you know what you want the money for, you'll find it easier to choose how long to invest for.

• Want to buy a house? You could invest for at least the next five years and potentially end up with a sizeable contribution for your new home.
• Want to send your child to university? Consider a Junior Individual Savings Account. Your child will be able to withdraw the investments as cash when they turn 18.
• Want a comfortable retirement? Think about investing a portion of your earnings into a pension every month from now until you retire. Any profit will increase the amount available to you in retirement.

You'll feel more committed to your investments once you know what you want to spend your money on in the future.