How to start investing

Whether or not you have a firm financial goal in mind, like buying a house or retiring early, it’s likely you’ve given some thought to saving money for a rainy day, at least.

The goal of investing is to grow your money for the future, rather than simply stockpiling it. This potential for growth is a big factor in separating investing and saving, as your money will be exposed to the ups and downs of the stock market as opposed to hopefully gathering interest in a bank vault.

The value of your investments can go up and down, and you may get back less than you invest.

The value of the cash in your pocket is eroding every year, as what you buy gets increasingly expensive. It’s the reason your grandparents might give you £1 in the thought you’ll be able to buy half the corner shop. It’s not so crazy when you consider that £1 in 1970 could buy the same basket of goods as £21.50 in 2024.

It’s only natural to want to combat that effect of currencies losing value over time (inflation) by giving your money a chance to grow. Parking it in a cash account might be one way and is useful when the rate of interest on offer beats the current rate of inflation. The problem is that’s far from a sure thing - over the past 10 years there have been long stretches when the interest on cash has lagged inflation significantly, meaning your spending power wouldn’t have kept up with the rise in prices.

Investing, by putting your money to work in the stock market, doesn’t guarantee you’ll beat inflation but the long-term performance of stock markets means it is one way to potentially keep up with price rises. Keep in mind that the other big difference between savings and investing is the risk you take in the stock market. This means that, while it is entirely possible to outperform the level of growth you’d expect from cash savings, you could also underperform it and lose your invested capital. However, that opportunity for growth needs context.

Stock markets have their ups and downs, as individual companies and whole markets face short-term tailwinds and challenges. But, zoom out and the general pattern shows markets rise over time. That’s because the companies creating value and attracting money tend to stick around and use profits to grow their businesses even further, and those that don’t are replaced by new ones serving ever-newer economies. For example, while the US S&P 500 Index, which tracks the 500 largest publicly-traded US companies, rose by 37.2% in 1995 and fell by 36.6% in 2008, the average annualised return since its inception in 1957 until the end of 2023 has been 10.3%, according to Officialdata.org.

Discrete calendar year performance

As at 7 February 2025. Source: FE Fundinfo. Past performance is not a reliable guide to future gains.

This highlights one of the key things to remember when investing: keep your eye on the long term. Just like the earth’s surface has jagged mountains and canyons up close and looks like a smooth ball from far away, if you stay focused on the big picture those short-term fluctuations can give way to a more consistent story.

Cast your mind back to school and you might remember the difference between simple and compound interest. As a quick refresher, when you earn simple interest, the first interest payment you receive stays the same for the life of the investment. However, if you take that interest payment and add it on top of the initial amount, it will start to generate its own return, or compound. This is the essential difference between the two types of interest, and is the basis of all long-term investing. The beauty of it all is that the main ingredient in allowing compound interest to work its magic is time. The longer you leave it, the greater the effect becomes.

Hypothetical example based on an initial investment of £1,000 and 5% simple and compound interest, over 30 years. When you invest your capital is at risk. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.

When it comes to applying this to stock markets, the idea is that good companies will either put their profits back into the business to compound value, or pay out dividends which you can reinvest to hopefully earn more next time.

For some people, the goal of investing is to supplement their income. It’s a common objective for retirees or those approaching retirement age and this is where dividends can really come in handy. If you have spent years reinvesting dividends or letting the companies in your portfolio compound their own profits and grow the value of the business, it can give you a useful platform to start taking some of that growth regularly as your own source of income.

As life expectancy lengthens and the time we hope to spend in retirement grows, maintaining a source of growth alongside an income stream becomes even more important. In this sense, investing can help grow your money to allow for regular withdrawals without eating into the main pot too much.

How much money do I need to start investing?

If you have a firm financial goal in mind, that might help you work backwards and give you a good idea of how much you need to be regularly putting away, and for how long, to hopefully get there. More broadly, it often depends on your personal income, expenses, timeline and risk tolerance, and how those factors fit well together for you.

With Robinhood, you can start investing for as little as $1 - with fractional shares, you have the flexibility to invest as much as you want in eligible stocks, in the knowledge those companies aren’t out of reach just because each individual share is priced too high for some budgets.

Whatever amount you choose to begin with, it’s a good idea to have an emergency fund set up before you start, to meet any unexpected short-term expenses. If your boiler gives up or the car needs repaired, the last thing you want to be doing is dipping into your investments.

What can I invest in?

With Robinhood, you can invest in over 6,000 global companies listed on US stock exchanges with no commission or foreign exchange fees.

A stock is a unit of ownership in a company. If you own a stock, that makes you a shareholder. As a shareholder, you may receive dividends, or periodic distributions of profit, if the company succeeds. You might also have a vote in some company decisions. Depending on the company’s performance and other factors, the value of your investment may change.

How to find an investment

People choose to invest (or not invest) in companies for different reasons. Even looking at the same company and data, two people might have different perspectives.

Some investors believe in “investing in what you know” - that means investing in companies whose products you use, or in industries where you have specialised knowledge. Others might prefer investing in the stock market as a whole (for example, buying shares of an ETF or diversifying their investments across many companies).

You can develop a perspective on investing by following the news, doing some research and learning about the different ways people manage their finances. When examining a stock or fund, it can be helpful to look at past performance (although this is no guide to future gains), the management team, prospectus and financial reports.

Ultimately, there are small steps you can take today to begin your investing journey. Starting small and starting early are often more powerful than waiting.

Sources:

• Office for National Statistics
• Bank of England
• Officialdata.org
• FE Fundinfo

Important information

When you invest your capital is at risk. Past performance is not a reliable guide to future gains. Your investments and the income you receive from them may go down as well as up so you may get back less than you invest.

Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice.

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