It can be hard to know whether we are always doing the right thing with our money. At the moment, for example, savings accounts are paying really low interest and so you might be thinking that perhaps you should be investing instead. This can be quite a temptation when we hear about the money that some people make. However, it is worth making sure that you have a full understanding of how investments work before you start investing.
What is Investing?
When we invest money, we actually buy something which we hope will increase in price. So, this could be shares in a company, for example and we hope the company will increase in value and therefore their shares will go up in value as well. It might be that we buy some antiques or art which will hope will go up in price. Some people buy a second home and rent it out and hope that when they sell it, it will be worth more money than when they bought it. Often with an investment, the value of the item is prone to going up and down.
What are the Advantages Over Saving?
Often the return on an investment is better than saving. For example, it can be possible to get an average of 8-12% a year on some investments but when you have savings you are more likely, at the moment, to get from 0-2% a year. It is obvious then, that there is a big advantage in that you have the capability of making a lot more money when you invest money compared to when you save it.
What are the Disadvantages Over Saving?
There are a lot of disadvantages to investing, but it is a good idea to think about I in terms of the amount of gain you could possibly make. Firstly, you will normally need quite a lot of money to start with. You cannot buy a house, with a small amount of money or even art or probably even many shares, so if you do not have a lot of money to invest then you may find that it is not an option for you.
There is also the risk that the investment will go down in value. The prices of the things people invest in do fluctuate up and down and so this is not unusual. However, this means that a lot of people will keep their investments for a significant period of time so that know that they are more likely to go up, rather than down in value. This is because over time the small price fluctuations will be filtered out. However, there is still a risk that the value may fall and it will depend on the type of thing that you invest in as to how high that risk it. This means that there are a lot of people that will only invest money that they can afford to lose and will use a financial advisor that can pick them an investment that will suit the risk level that they have. It is worth noting that it is generally the riskier investments that are more likely to pay out more money compared with the lower risk ones that are likely to bring the lower returns. You will need to think about what risk you are prepared to take.
Lastly, you will have to pay capital gains tax when you sell your investment if it has increased in value over a certain amount. You will also have to pay tax on any income you get form the item. Such as rent if you buy a second home or dividends if you have shares, so you will need to consider that as well.