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Are shares right for me?

Are you trying to decide whether or not you should invest in shares? Here are some of the things that you need to consider before you take the plunge. If you’re not sure that investing in shares is right for you, seek independent advice.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How more risk could mean better rewards - but a greater risk of losses.
  • Why your investment timeframe is important.
  • Why research matters.

Investing in shares won’t be right for everyone. You will need to accept the risk that you could get back less than you put in.

Many investors may decide that this risk is worth taking in the hope of achieving potentially higher rates of return than they would from supposedly ‘safer’ investments such as cash savings accounts, but many more may not.

Shares are not a short-term investment, so they are usually best suited to investors who are able to hang on to them for at least five years or preferably longer.

There are two main ways you can hold shares in your portfolio. You can buy shares directly and choose the companies you want to invest in, or you can invest in a fund which pools your money with other people.

Selecting individual shares takes time and skill. It is usually only possible for experienced and knowledgeable investors to do this. Furthermore, holding shares in just one or a few companies is high risk because if these few companies (or just one of them) run into difficulties you could lose some or all of the money you’ve invested.

Investing in pooled investments such as unit trusts, open-ended investment companies (OEICs), investment trusts and Exchange-Traded Funds (ETFs) can help spread risk because you are putting your money into a wider range of shares, bonds and other assets which are selected and monitored by professional fund managers.

The age-old rule of not putting all your eggs in one basket applies here. Make sure your investments aren't all with the same company, or a single sector or, indeed, a single asset type. The main asset classes are shares (equities), Government bonds, corporate bonds, cash and property. It's a good idea to spread your money between these classes, so if one falls in value, the others might hold or improve their value. This does not mean that funds are without risk, and you could still get back less than you put in.

Whichever route you might be considering, before you start investing in shares, you first need to make sure your finances are in order. You can read about planning your finances and how to make sure you don't invest with money you might need to cover an emergency, here:

The money put aside for investing in shares should be:

  • An amount you could potentially afford to lose
  • An amount you can invest for long enough to appreciate in value

Risk control

Understanding your approach to risk can help you decide whether shares are the right investment for you. Risk means recognising investments can fall in value as well as rise and you might get back less than you invest. There are steps you can take to minimise risk, for example, by making sure your portfolio is properly diversified, but you must think about how different types of risk could impact your investments. We've covered these areas in depth in our article on reducing unnecessary risk.

Tolerance of risk is intensely personal - what one investor is prepared to risk might cause severe stage fright in another. You will know better than anyone the level of risk you're prepared to take with your money. You need to understand you may not get back the money you invest, let alone an actual return. When dealing in shares this risk never goes away.

Risk comes in a number of forms. Individual shares that you invest in are exposed to market sentiment. This means your shares will only rise in value if there are buyers who want them. The main factors that directly affect the desirability of your shares to other buyers are:

  • Political risk
  • Economic risk
  • Currency risk

These three will need to be researched, understood and monitored before you buy shares. Some investors at the research stage come to realise that an investment in a single stock is too risky for them. If this sounds familiar, you can still make a share investment through a fund where the risk is well-spread and the shares are picked by an expert fund manager.

What are the next steps?

If investing in shares appeals to you, the next step is to read our introduction to shares. If you’re not comfortable going it alone, you may want to seek professional financial advice before you proceed. A financial adviser can recommend which shares and investments might be suitable for you based on your financial plans and goals. You’ll be charged for any advice you receive.

Investing in shares requires a degree of engagement in the market and it’s important that you research the companies you want to put your money into. Investors stand a much better chance of making investment gains - rather than some chance profit from short-term market blips - if they stay invested in their chosen companies for at least five years, but preferably longer. This is because in a typical economic cycle, it is hoped that five years may be enough time to recover from downturns in the market. Of course, this isn’t a guarantee - you can still get back less than you initially invested after this time.

Advice from fellow share investors with a number of years' experience suggests starting off with companies whose business you understand. For example, utilities, retail, transport, healthcare, technology are all sectors that impact on our daily lives and whose business we’re familiar with.

As well as reading up on any companies you’re planning to invest in, you may also want to look at the sectors they're banded within. Some sectors are experiencing periods of growth, others are moving through more stagnant cycles.

The London Stock Exchange (LSE) provides a vast amount of information, updated regularly, on all the stocks listed on the exchange, along with in-depth market news and stock trading tips.

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