The Essential UK "How To Invest" Beginner's Guide for 2023

Stocks are one of the most popular investments in the UK, with 33% of Brits owning shares. When buying stock, you’re effectively purchasing a small stake in a company. Corporations usually sell stock to raise money, which is used to expand their business. Once the company grows and becomes more valuable, the stock price increases, giving investors a return. Additionally, some corporations will distribute a portion of their annual profits as dividends.

Types of Stock

• Blue-chip stocks: These stocks are issued by well-established, financially stable companies with a steady history of growth. Blue-chip stocks are generally considered a safe investment compared to other options.

• Penny stocks: These are shares of small, unproven companies that trade at a low price. They are considered high-risk due to volatility and low liquidity. Therefore, you may purchase a penny stock and find cashing out challenging as no investors are actively trading.

• IPO stocks: IPO (Initial Public Offering) stock is when a privately held company goes public to raise capital for expansion by selling shares of stock to the public for the first time.

• Common stock: The majority of stock is issued in this form. Common shares represent ownership in a company and potentially provide a portion of the corporation's profits in the form of dividends. Common stock also gives investors the right to elect the board of directors and vote on company policies. In liquidation, common shareholders have the right to company assets after preferred shareholders, debtholders, and bondholders are paid in full.

• Preferred stock: This stock typically does not come with voting rights. However, preferred stock holders are entitled to a fixed dividend, which is paid before common shareholders receive their dividends. Also, if the company goes bankrupt, preferred stock holders have priority over common stock holders. This stock is less risky to purchase but also has less potential for appreciation value.

• Growth stock: These are shares in a company that is anticipated to grow significantly in the short term. Generally, growth stocks do not offer dividends as the company wants to reinvest their profits to expand the business.

• Income stock: Companies issuing these stocks pay a significant portion of their profits in dividends to shareholders. They are great for investors looking for a steady stream of income. However, income stocks tend to have less appreciation value compared to growth stocks.

• Safe stocks: Safe stocks, also known as low-volatility stocks, are viewed as safer investments since share prices fluctuate minimally. Typically, these businesses operate in industries that are not sensitive to changing economic conditions.

• Defensive stocks: These stocks provide consistent dividends and stable earnings regardless of how the market is performing. Investors seeking a safe investment during weak economic periods like recessions will divert to buying defensive stocks.

Pros and Cons of Investing in Stocks

Top Platforms for Investing in Stocks and Shares

Contract for Differences (CFDs) are a type of derivative product that allows traders to speculate the future price movements of an asset, such as stocks, commodities, currencies, and indices, without owning the underlying asset. CFDs are attractive for short-term investments because they allow better flexibility, plus you can trade in both falling and rising markets.

Moreover, CFDs can be traded with leverage, amplifying returns but significantly increasing risk. It’s important to note that CFDs are considered high-risk investments, and 82% of investors lose money trading Contract for Differences. Before trading, it’s crucial to have a solid understanding of the market and the mechanics of CFDs, such as leverage, stop-loss orders, margin, and more.

Types of CFDs

• Stock CFDs: Allows investors to trade various stocks and shares without owning the underlying asset.

• Index CFDs: Allows investors to take positions on the performance of indexes, such as the S&P 500 and FTSE 100.

• Cryptocurrency CFDs: Allows investors to speculate the future value of a specific cryptocurrency. Additionally, some brokers allow leverage trading on popular coins, like Bitcoin and Ethereum.

• Commodity CFDs: Allows investors to take positions on commodities like silver and oil.

• Sector CFDs: Provides the ability to invest in a specific market sector rather than a single company. Some examples of sectors you can invest in are technology, healthcare, and energy.

• Inflation CFDs: Provides traders with the ability to profit from changing inflation rates by setting long or short positions.

• Forex CFDs: Investors trading forex CFDs capitalise on price fluctuations between currency pairs. They offer endless opportunities for traders with various strategies usually driven by economic and geopolitical factors.

Pros and Cons of Investing in Stocks

Top Platforms for Investing in Stocks and Shares

Investing in an ETF can be thought of as a hybrid between investing in a mutual fund and a stock. Like a mutual fund, an ETF represents a basket of securities that reflects an index. However, unlike a mutual fund, an ETF trades like a regular stock on an exchange, allowing for more flexibility and control over buying and selling.

One of the major advantages of ETFs is their diversification. By owning an ETF, you gain exposure to a basket of securities rather than just one individual stock. Additionally, ETFs have low expense ratios, making them a cost-effective option for investors. For example, the SPDR S&P 500 ETF (SPY) has an expense ratio of just 0.0945% as of 2022.

It’s important to note that ETFs attempt to replicate the return on indexes, but there is no guarantee that they will. Also, the price of an ETF fluctuates throughout the day, reflecting supply and demand. This means that the actual index's year-end return and that of an ETF may be slightly different.

When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade. This makes ETFs an excellent option for investors looking for the diversification of a mutual fund, combined with the flexibility and control of a stock.

Types of ETFs

• Sector ETFs: Sector ETFs contain stocks of companies that operate within the same or similar industry.

• Dividend ETFs: These ETFs are a basket of companies with a history of paying dividends to shareholders.

• Market-cap Index ETFs: Based on a company's market capitalisation, they can be pooled into 3 separate ETFs - low, mid, and high market cap.

• Currency ETFs: These are a basket of currencies like the US dollar, Euro, and Great British Pound.

• Commodity ETFs: Commodity ETFs consist of multiple raw materials such as oil and gold. They are excellent for diversifying your portfolio without needing to invest in each commodity individually.

• Bond ETFs: These ETFs track a basket of bonds and are created to provide regular income to investors. Bond ETFs can include the following: government, corporate, and municipal bonds.

Pros and Cons of Investing ETFs

Top Platforms for Investing in ETFs

Forex trading, also known as foreign exchange trading, is buying and selling of one currency for another. The goal of forex trading is to generate profit from changes in the value of currency pairs. One of the advantages of forex is the ability to quickly exit and enter positions due to high liquidity, making it a popular choice for both expert and beginner traders.

However, forex trading does not come without risk. Economic and political factors are unpredictable and can influence currency pairs significantly. Therefore, before indulging in forex trading, it’s a great idea to have a clear trading strategy to manage risk.

Types of Forex Trading

• Swing Trading: This strategy requires holding on positions for a few days to a few weeks to profit from short-term price swings. Swing trading requires identifying key support and resistance levels and then investing accordingly.

• Day Trading: Day trading is a popular strategy involving opening and closing positions within the same day to take advantage of short-term price movements. This strategy relies heavily on technical analysis and real-time monitoring to make calculated trades.

• Scalping: This is a high-frequency trading strategy where investors capitalise on small price movements in the market. Usually, traders will hold on to their position for a few minutes at a time and sell as soon as the trade is profitable. Scalping is suitable for traders who can dedicate a significant portion of their time to monitoring the markets.

• Position Trading: This is a long-term strategy where traders will hold a position for extended periods, usually lasting for months. Position trading is based on a fundamental analysis of the market, taking into account political and economic factors that can affect currency values. A popular technique is support and resistance trading, where investors look for key levels on the chart where prices may reverse or pause.

Pros and Cons of Forex Trading

Top Platforms for Forex Trading

Commodities are raw physical goods that are traded in the financial markets, such as oil, precious metals, and agricultural products. Investing in commodities is an easy way to diversify your portfolio and hedge against inflation. This is because commodity prices tend to move opposite of the stock and bond market during economic uncertainty.

However, commodities carry risk like any other investment and external factors like weather, politics, and other global events can impact prices. For example, a war in a major-oil producing country can cause oil prices to spike, or droughts in agricultural areas can cause food prices to increase.

Types of Commodities

• Energy: This commodity includes oil, natural gas, propane, coal, ethanol, and unleaded gasoline.

• Metals: This commodity includes precious metals like gold and silver along with industrial metals like aluminium and copper.

• Agricultural products: This commodity includes products like coffee, wheat, lumber, and corn.

• Livestock and meat: This commodity includes live cattle, beef, pork, and other animal-related products.

Pros and Cons of Investing in Commodities

Top Platforms for Investing in Commodities

Certificates of Deposit (CDs) are debt securities that are issued by banks and other financial institutions. They pay a fixed interest rate over a period, typically ranging from a few months to a few years. CDs are considered low-risk investments and are often used by conservative investors as a way to earn a guaranteed return on their money.

Types of Certificates of Deposit

• No-penalty CDs: Usually, CDs will penalise investors who want to withdraw before the predetermined date. No-penalty CDs are ideal for investors who want flexibility and access to their funds without paying fees. However, this CD will pay lower interest rates than regular CDs.

• Foreign currency CDs: Alternatively, you can invest in other currencies like Euros and US dollars rather than Sterling Pounds. These CDs carry more risk but offer higher yields.

• Variable CDs: The interest rate on this CD may fluctuate over its term, potentially offering higher returns but also carrying the risk of decreased returns if market rates decline.

• Bump-up CDs: Allow for the potential to increase your interest rate once during the term of the CD. This can be a useful option if you anticipate a rise in interest rates in the future.

• Brokered CDs: These CDs are purchased from brokers or financial advisors rather than banks. Often brokered CDs have longer terms and yield higher returns than banks.

• High-yield CDs: High-yield CDs may require you to commit to longer terms or make a bigger initial investment. The benefit of these CDs is they offer higher APYs compared to other options.

• Jumbo CDs: These CDs are similar to regular Certificates of Deposits but require a much larger investment. The advantage of this CD is you’ll receive higher interest rates.

• Add-on CDs: This is a special type of CD that allows for additional investments after the initial deposit, making it ideal for those who plan to invest continually over the course of the CD's term.

Pros and Cons of Certificates of Deposit

Top Platforms for Investing in Certificates of Deposit

Index funds are investment vehicles that aim to replicate the performance of a specific market index. The most well-known index fund is the S&P 500, which tracks the stock performance of the top 500 companies listed on the US stock exchange. However, many other indexes cater to different markets and strategies.

By investing in an index fund, investors gain access to a diversified portfolio in one easy, low-cost trade. Some index funds provide exposure to thousands of securities, which helps minimise overall risk by diversification.

Types of Indexes

• Broad Market Index Funds: These funds consist of assets from multiple markets, such as stocks, bonds, or any other type of security.

• Market Capitalization Index Funds: These funds are made of companies based on their market capitalisation. Some examples include the NIFTY 50, NIFTY Smallcap 250, and the NIFTY 200.

• Equal Weight Index Funds: Equal weight index fund aims to distribute the weight of each stock in the index evenly rather than by market capitalisation. This can potentially lead to higher returns but also involves higher volatility and less diversification. These funds are considered a smart-beta strategy, as they aim to provide better returns than traditional market-cap-weighted index funds.

• Sector-Based Index Funds: These funds target stocks or commodities in specific industries, such as energy, agriculture, and technology.

• International Index Funds: International index funds offer Brits the opportunity to diversify their portfolio by gaining exposure to markets beyond the UK, allowing them to capitalise on growth and potential returns in foreign economies.

Pros and Cons of Investing in Indexes

Top Platforms for Investing in Indexes

Cryptocurrencies are a digital form of currency that utilises blockchain technology for secure and transparent transactions. This decentralised system uses advanced cryptography to protect the integrity and security of the cryptocurrency, with each block in the blockchain containing a record of multiple transactions that cannot be altered once added to the chain. This ensures the authenticity and reliability of the cryptocurrency.

The most well-known cryptocurrency is Bitcoin, but there are many other coins, such as Ethereum, Polkadot, and Dogecoin. Each coin has a unique set of features and technology that gives it value and differentiates it from other cryptocurrencies. For example, Bitcoin is primarily used as a store of value, while Ethereum is used as a platform for building decentralised applications.

Polkadot and Cosmos, on the other hand, focus on providing interoperability between different blockchain networks, allowing for a more connected and scalable ecosystem of decentralised applications. Understanding the specific use cases and underlying technology of different coins can help investors make more informed decisions when selecting which coins to invest in.

However, before investing in a cryptocurrency, it’s important to thoroughly research the project. This can include reviewing the background and qualifications of the founding team, engagement of the community, and evaluating the coin’s roadmap.

Types of Cryptocurrency

• Tokens: Tokens, also known as digital assets, are created and issued on top of existing blockchain platforms. They represent a specific asset or utility and have a wide range of use cases, such as in-game currency, payment for services, and more. One example of tokens is ERC-20, a widely-used standard for tokens on the Ethereum blockchain.

• Altcoins: These are any cryptocurrencies other than Bitcoin.

• Stablecoins: Stablecoins are cryptocurrencies pegged to a stable asset, like the US dollar. They were designed to provide traders with a way to protect their investments during volatile market conditions by holding a stable asset without needing to exchange it for fiat currency.

• Meme Coins: Meme coins, such as Shiba Inu (SHIB), are digital assets created as a joke and not as a serious form of payment. They are known for their highly volatile prices and often rely on viral memes and community hype to drive their value. They are not considered sound investments as their value is not based on any underlying assets or technology.

• Smart Contract Coins: These cryptocurrencies are based on smart contract technology, allowing for the creation of decentralised applications (dApps) and the automation of specific processes.

• DeFi Tokens: These are digital assets used to participate in decentralised finance (DeFi) applications, like lending, staking, and borrowing coins.

• Privacy Coins: These are cryptocurrencies focused on increased privacy and anonymity for transactions. Unlike Bitcoin, where transactions are recorded on a public ledger, coins like Monero will not disclose where funds are being sent from or to which wallet they were sent.

• Non-Fungible Tokens (NFTs): These are unique digital assets stored on a blockchain. They cannot be replaced or replicated, making them ideal for collectables such as digital art, crypto games, and metaverse items.

• Utility Tokens: Utility tokens are used to gain access to a specific product or service within a cryptocurrency’s ecosystem.

Pros and Cons of Investing in Cryptocurrency

Top Platforms for Investing in Cryptocurrency

NFTs (non-fungible tokens) are a super cool and unique way to own a piece of digital art, music, or even metaverse real estate. They’re stored on a blockchain, a digital ledger that keeps track of who owns which asset. Buying NFTs is similar to purchasing rare Pokemon cards, but instead of a physical card, you receive a unique digital file.

NFTs are like digital fingerprints, each one is unique and has its own characteristics. When NFTs are stored on a blockchain, they contain metadata which differentiates them from other non-fungible assets. This makes verifying NFTs for authenticity easy, as you can see the transaction history and digital signature on the blockchain.

When it comes to trading and buying NFTs, there are a few popular platforms you can check out. OpenSea, Rarible, and SuperRare are amazing and well-designed platforms that make buying NFTs straightforward.

While NFTs have a lot of potential, they are highly speculative, and many investors have lost money trying to trade NFTs. Most NFTs do not withhold their value, so it’s important to research the projects you are interested in thoroughly. Also, this market is relatively new and not fully regulated, which can make it too risky for some investors.

Types of NFTs

• NFT Games: These digital collectables can be used in blockchain-based games. Players can profit from these games by obtaining rare NFTs and selling them to other players. Some popular crypto games you can try are Axie Infinity, The Sandbox and CryptoKitties.

• NFT Domain Names: NFT domains represent ownership of a specific website address and can hold different values depending on the name. These assets offer opportunities to profit by buying domains and reselling them at a higher price.

• NFT Digital Media: These NFTs can include digital assets such as art, music, videos, and other forms of media. The rarity of an NFT often drives its value and makes it appealing to other investors.

Pros and Cons of Investing in Cryptocurrency

Top Platforms for Investing in NFTs

Bonds are a great way to add stability to your portfolio as they are generally considered low risk. Essentially, Bonds are loans that you make to a government or company; in return, they promise to pay you back with interest. The time it takes for the bond to be repaid can vary from months to 30 years. One of the best parts about bonds is they are usually taxed at a much lower rate compared to other investments.

However, not all bonds are created equal, and some are riskier than others. Generally speaking, bonds issued by the government are safer, while bonds from new companies are riskier.

Types of Bonds to Invest in

• Treasury Bonds: Government-issued treasury bonds are considered one of the safest investments in the market. They have high liquidity, so you can easily exit your position.

• Municipal Bonds: These bonds are issued by state or local governments and considered safe investments, much like treasure bonds. Also, they may offer great tax advantages.

• Corporate Bonds: If you’re looking for a bit more excitement, perhaps corporate bonds will interest you s

• ince they have higher risk than government bonds. However, you can buy investment-grade corporate bonds, which companies issue with excellent credit ratings.

• Short-term Bond Funds: If it’s your first time investing in bonds, short-term options are a perfect place to start. These funds invest in a wide range of bonds with shorter maturities, typically less than three years. Therefore, they are less sensitive to interest rate changes compared to long-term bonds.

Pros and Cons of Investing in Bonds

Top Platforms for Investing in Bonds

Capital gain tax is tax on profits you make whenever you sell an asset like stock or cryptocurrency. In the UK, capital gain taxes start at 18% for basic rates and can reach up to 28%, depending on your tax bracket. However, all UK investors have a personal allowance of up to £12,300, meaning you won’t pay taxes on profits until you exceed this amount.

When you earn money from investments like dividends or interest from bonds, you have to pay income tax. Basic rates start at 20% and can reach up to 45% depending on the amount of income you’ve earned. Like capital gain tax, you can take advantage of the personal tax scheme up to £12,570.

Before investing your capital, it's generally a good idea to have a basic understanding of the taxes you’ll pay and the benefits you can receive. The UK’s government website, gov.uk provides all the tax information in an easy-to-understand format.

Alternatively, you can consult with a financial advisor or a tax professional, saving time as you won’t need to research this information yourself. Also, with their experience, you’re more than likely going to utilise other tax benefits you otherwise wouldn’t have known about.

Economic indicators provide insights into how the current market is performing and can help predict how the market will look in the future. Some important indicators that affect the stock market are GDP (gross domestic product), inflation, and employment figures. Mainly, these factors indicate if the economy is growing or shrinking.

Global events, like political turmoil, trade policies, and natural disasters, can negatively impact markets. Therefore, it’s important to keep up to date with currency events so you can adjust your investments accordingly.

Different sectors of the economy can play a major role in the profitability of your investments. For example, the technology sector is driven by innovation, while energy may be influenced by changes in government regulations and policies. Understanding and staying on top of these changes will help identify potentially profitable trades.

One way to get into various sectors in the market is with sector-specific ETFs and indices. These are investment vehicles that pool multiple assets under one umbrella. This saves time as you won’t need to invest in each asset individually.

Keeping track of economic factors can seem overwhelming at first. However, there are plenty of tools and resources available that will help. For example, you can use online financial news websites that provide up-to-date content on new developments within the market. Most of these websites also often have a newsletter, so you can instantly receive a notification once a new article goes up.

Moreover, following expert investors on social media can offer valuable insights and analysis that you otherwise wouldn’t have access to. Another great way to stay on top of the market is with mobile apps like TradingView and StockTwits, which provide real-time market data. Many brokers come with their own analysis, news, and alerts section.

When you’re getting ready to start investing, it’s important to stop and think about how much risk you are comfortable taking on. This will help you decide which investment types are right for you. For example, if you’re a conservative investor, government-issued bonds may be ideal as they are generally low-risk. On the other hand, perhaps you are open mined to higher risk investments like cryptocurrencies, which are extremely volatile but have the potential for huge returns.

Alternatively, you may want to invest in both markets and share the risk. This is called diversification and helps minimise losses as your investments are spread out across multiple markets.

Should you invest while in debt?

You should never invest while in debt. Let's take Tesla and Facebook as an example - both were considered safe investments in their respective industries. However, during the last few years, their prices have fallen significantly due to bad management and external factors. Remember, each investment carries risk, and there is always a chance you will lose money.

Should I borrow money to make investments?

Never borrow or take out loans on investments because this drastically increases risk. Your investment could end up performing badly, and as a result, you’ll be in the negative and still need to repay your load, likely with interest.

Although some investment strategies utilise borrowing funds like leverage trading, they are not recommended for beginners. Without in-depth knowledge and experience, attempting to invest in this manner will likely result in a financial loss. Beginners should first gain a solid understanding of the markets and different investing strategies before attempting complex investments, such as leverage trading.

Having investment goals is ideal for creating a successful strategy. Whether your goal is to save for retirement or a down payment on a home, having a clear goal in mind will help you make informed decisions when investing. Remember to take out profits along the way, as you never know when market conditions can swing negatively.

Selecting an investment platform can be overwhelming, especially if it’s your first time. It’s important to research the platforms you intend to use to ensure they align with your investment needs. Some platforms will provide a broad range of assets, while others specialise in a specific category, for example, crypto exchanges. Some of the main aspects to look into before creating an account are:

• User friendliness

• Customer service

• Investment assets offered

• Trading tools provided

• Fees

• Regulators and licences

• Mobile experience (consider a mobile-first investment app if this is important to you)

Don’t hesitate to try and test out multiple platforms to see which works best for you. A great way to know if a platform is worth your time is by reading previous investors' reviews and seeing what their experience was like.

Diversification is ideal for reducing risk as your money is spread out in multiple markets. Therefore, if one market performs negatively, your other assets will keep up, and your eggs are not all in one basket. Indexes are perfect for diversifying your portfolio as they can track various sectors, companies, and commodities.

It’s a great idea to take some time to educate yourself on the market and research the ins and outs of each investment. This will help you make more informed decisions and better grasp the potential risks and rewards.

Seeking professional help is always a good idea, as these people have a better understanding of the investment landscape. They can offer valuable insights and help guide you through your first investments.

Starting small is a smart move when you’re first learning about investing. Ideally, you’ll use a demo account to buy assets without any repercussions. However, you can also begin with a small starting capital and work your way up. This minimises risk while still exposing you to markets.