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What is investing?

Investing is the act of putting your money into assets – like stocks, bonds, funds, property or businesses – with the goal of growing your wealth over time (we’ll come back to assets). 

Unlike saving, which typically means holding cash in a bank account, investing allows your money to work for you, potentially earning returns through compounding – the further returns that your reinvested returns earn, or dividends – payouts of cash from positive returns. 

Another key difference is that with investing, your money can go up or down in value, which we’ll explain in more detail. 

Whether you're investing for retirement, buying your first home, or building long-term financial security – starting early and staying consistent can make a huge difference.
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How does investing work?

Investing works by buying an asset at its current value, with the aim of selling it at a higher, ‘appreciated’ value, and generating a profitable return. 

Depending on the type of asset an investor holds, any potential gains can be ‘realised’ in a number of ways. For the purpose of this guide, we will focus on stock markets, but this concept can be applied to most investments. Learn about stock market basics.

Think of the stock market like a real market: a place where you can buy and sell your shares. If you buy a share for £10, and the value moves up to £15 in the stock market, and you sell, you have made £5. The sale of your share for a profit is called ‘realising’ your gains. 

For the period you own your share, you are a ‘shareholder’.

The movement of share prices within the stock market relates to the performance and value estimations of a company. As previously mentioned, these prices can move up or down, sometimes dramatically, and this is an important thing to consider when thinking about investing. 

The degree of risk an investor is comfortable with enduring onto assets during price movements, is called ‘risk tolerance’. You can read more about risk in our full guide.
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What are the basic types of investments?

Investors have a number of asset classes they can invest in:

• Equities, stocks or shares are a stake in a company or property. 
• Bonds or fixed-income investments are loans to companies or governments who pay fixed interest as a return. 
• Cash or cash equivalents, such as money market funds, invest in short-term debts.
• Property is where the value of your investment is held within a property’s price.
• Commodities are assets such as gold or silver.
• Cryptocurrencies are digital currencies created and stored electronically. 

A collection of assets is called a portfolio. You can invest in one or more of these assets at the same time, and investors generally choose to hold a mix of asset classes, to make their portfolio diverse. You can read more about asset classes in our full guide. 

Investing vs saving: what’s the difference

As we’ve already touched on, the value of your investments can go up or down. This differs from a savings account, where you are given an interest rate. This interest rate is a guarantee that the nominal value of your savings will appreciate, and pay out interest within your savings account. 

For example, if you save £100 at 5% AER, the value of your savings will be £105 at the end of year one. Simple, right? Well, there is an invisible force at work against your money, called inflation. 

Think of inflation, simply, as things getting more expensive over time. If a loaf of bread costs £1, but inflation is 5%, the next year it will cost £1.05. The same goes for your savings. If inflation is 5%, and your interest rate on your savings is 5%, the purchasing power of your money will remain the same after a year.

With investing, your money is closely tied to the performance of the assets you’ve invested in. For example, if you bought a share in a company for £100, and after the first year, the value of that company had appreciated 5%, your investment would be worth £105. 

Historically, investment returns have outperformed the interest of cash savings accounts, and can act as a better protection against inflation, if your returns are higher than the inflation rate.
 

How much do I need to start investing?

With Chip, you can start investing from £1. Traditionally, investing has been viewed as an expensive activity, due to previously high brokerage fees and minimum investments. 

The rise of online investing has made investing far more accessible, and sustainable for all of us. Investing little and often, with a proper investment strategy is the most effective way to grow your money, and this is far more important than having loads of cash to get started.
 

Understanding investment accounts

If you’re ready to get started with investing, the first step is to choose which investment account is right for you. 

With Chip, you can choose to invest with either a Stocks & Shares ISA, or a General Investment Account. The core difference between these two accounts, is the Stocks & Shares ISA gives you access to tax-free returns (invest or save £20,000 each tax-year across all ISAs) and the General Investment Account does not. 

So, if you have some of your £20,000 allowance to use, a Stocks & Shares ISA could be your best option, and if you have used your allowance this tax-year, you can opt for a General Investment Account. 

These aren’t your only options when it comes to an investment account, and our next guide covers what’s out there in the UK, to give you the full picture. 

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than your original investment. Chip does not offer financial advice and this should not be considered as a personal recommendation. Diversifying means spreading your investments across different sectors, countries and asset classes.

Seccl Custody Limited is the ISA Manager for the Chip Stocks and Shares ISA. Fund management charges apply. ISA limits apply. Invest £20k per tax year. Chip does not provide tax advice or financial advice. Tax treatment depends on individual circumstances and may be subject to change in the future. GIA proceeds are potentially taxable, subject to any annual exemption that may apply.