Those who shy away from investing in anything but cash face missing out on the potential higher returns offered by investing in equities and other assets.
But the world of investing can seem a daunting one, so here we offer investment virgins a guide to getting started.
Decide on the basics
The Association of Investment Companies (www. theaic .co.uk) suggests investment novices kick-off by deciding what they want from their investment: regular income, growth in their capital or something of both.
Decide how long you are prepared to invest; for equity investments the minimum time frame should be between five and 10 years, say investment experts.
All new investors should consider holding their investment within an Individual Savings Account (ISA) – a tax-free "wrapper" – through which everyone can save up to £7,000 a year without paying tax on any returns.
Regular ISA savers, as opposed to those investing a lump sum, benefit from "pound-cost averaging" where buying into the stock market on a monthly basis smoothes out the highs and lows of share prices over time.
The level of risk you are comfortable with is a key decider when it comes to picking out which investment plan. Very roughly speaking, the higher the risk, the higher the potential returns, but equally you run greater risk of not getting back what you put in.
Philippa Gee, investments director at discount broker Torquil Clark ( www.tqonline.co.uk) advises caution: "Don't just focus on the upside, seriously think about how much you are prepared to lose to chase higher returns."
Ways to invest
Investors can have "direct holdings" which simply means they buy shares in companies usually via a stockbroker. Brokers such as TD Waterhouse, the Share Centre and Barclays Stockbrokers allow you to trade online or over the phone, and generally charge upwards of £10 per transaction. There is also stamp duty of 0.5 per cent to pay on every trade.
Most new investors, however, should consider what are termed "collective " investments, such as unit trusts, OEICs (open ended investment companies) and investment trusts – before investing directly in individual companies.
Darius McDermott, managing director of Chelsea Financial Services ( www. chelseafs.co.uk), says: "Going for, say, a unit trust where investments are pooled is less risky than buying single shares and you also benefit from a professional fund manager and having access to a diversified portfolio of investments without having to buy lots of different shares."
One collective investment vehicle can hold a variety of investments, which might include equities from all over the world and from different industries, as well as bonds and commercial property. This spreads the risk and means you aren't dependent on a few individual stocks flying to make a healthy return.
How to save into a collective investment
The charges associated with collective investments include an initial charge, worked out as a percentage of your fund of around 5 per cent, and annual management charges from about 1.5 per cent.
Investors can go directly to the investment company offering their preferred unit or investment trust, but, perhaps surprisingly, it is cheaper to go via what are known as a "discount brokers".
These companies operate a system where investors pay lower charges than buying off an investment company. They are typically "execution-only" services, meaning that while they offer investment research information, they don't advise customers on where to invest.
Colin Jackson, director at discount broker Baronworth Investment Services (www.baronworth.co.uk), says: "All the good discount brokers give you rafts of information, as well as split the commission investment companies pay when you buy a fund. We rebate some of this payment back, meaning an investor might save around £350 on a typical £7,000 ISA fund than if they went direct."
When picking a discount broker, look at the levels of commission rebated, but also at the level of service on offer, including how easy it is to transact online and the free research and reports provided.
Both investment companies and discount brokers can provide investors access to what are known as online "fund supermarkets" such as www.cofunds.co.uk and www.fidelity.co.uk. These platforms allow individuals to invest in hundreds of funds from dozens of companies.
Ms Gee says that while new investors could easily divide their investments over dozens of funds, they should probably cap their initial choices at three.
There is a great deal of information freely available for novice investors, both from discount brokers and websites such as www. trustnet.co.uk, which can provide all the guidance needed to make investment decisions.
However, if you feel you need to work with a financial adviser to make decisions, the AIC recommends immediately establishing whether your adviser specialises in investment advice and whether they are paid via fees or commission. To find a financial adviser in your area, visit www. unbiased.co.uk. As well as providing listings of local IFAs, the site also allows you to filter your search to look for those who have specialist investment qualifications.
Investment choices for newbies
When finally making your first choices, advisers are clear on the classic mistakes to avoid: don't follow trends, invest in sector-specific funds, or base your choices on past performance: "A fund might have done exceptionally well to date, but that's no guarantee this performance will continue into the future," says Ms Gee.
That said, investors will always look at track records and one way of making an appropriate investment choice is to research the background, experience, style and analytical support available to the fund manager heading up the investment plan you like the look of. Look at the stated objective of a fund (for example, beating, or "over-performing" against a particular benchmark in order to generate maximum capital growth) and how likely it seems the manager will meet this aim.
In terms of current fund choices the experts favour for new investors, Ms Gee likes the diversification provided by global funds such as Jupiter's Global Managed Fund, Newton Global Higher Income and Skandia Global Best Ideas.
For low risk new investors Mr McDermott favours HSBC's Open Global Return Fund because it provides access to equities, bonds, property and private equity. For medium risk-takers he highlights the Artemis European Growth and for high risk investors he likes the Allianz RCM Bric Stars Fund which invests in companies in Brazil, Russia, India and China (hence the name).
No need to fear the jargon
Volatility: The stock market price of shares can go up and down. The more the value of the share price moves both up and down over a period of time the more volatile it is deemed.
Discounts and premiums: Typically, investment trust shares trade at a " discount" which means the share price is lower than the value of the underlying assets. Investors buying at a "premium" pay more than the value of the assets. The former is not automatically a good thing and the latter bad, situations change quickly. The whole issue of where discounts and premiums stand should never be the sole reason for buying or selling.
Gearing: The process by which investment companies borrow to invest because the fund manager expects the returns on the investments they buy with borrowed cash will exceed the costs of borrowing. The more a trust borrows, the riskier it is, so the higher the gearing, the higher the risk.
'I play it safe'
At just 23, David Okoye, is already a dedicated investor, regularly putting money into the Schroder UK Mid 250 Fund.
This fund's objective is long-term capital growth by investing in medium-sized companies listed on the FTSE Mid 250 Index, businesses which can hold greater potential for continued growth than their larger counterparts.
"I'm happy to take a higher risk, but I also have a safe cash fund to use if I need it," says the London-based client service consultant. David, who is saving for a deposit for his first home, chose not to take advice. "There's so much information out there, I make investment decisions myself."Reuse content