What is investing? A beginner’s guide for football fans

If you’re new to investing, it’s natural to feel a little nervous – a bit like the first time you ever step inside a packed football stadium.

Everyone around you seems to know the chants, understand complex tactics and speak a language you’ve never heard before. Terms like ‘compound growth’, ‘passive funds’ and ‘liquidity risk’ can sound as confusing as a new coach struggling to explain a false nine formation.

But while the world of stocks, funds, pensions and markets may seem full of jargon and risk, investing is itself a simple idea – to put your money into a share, bond, fund or other asset that has potential to grow in value over time.

The goal is all about the long term – to help build your wealth and boost returns at a much greater rate than inflation over a number of years (unlike cash savings, where your focus is on keeping it safe instead, with some growth on top).

And while there are plenty of risks involved, investing is often considered one of the most common ways to create financial security for the future.

You also don’t need to be wealthy to get started. Today, you can find online investment platforms that let you invest small amounts regularly, often from as little as £10 per month.

Our guide explains the basics of investing, the risks involved, and the most common types of investments available to beginners.

Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.

^{Key Summary}

• Any investing involves a degree of risk: The value of your investments can rise and fall over time.
• The role of diversification: It is often said that spreading your money across different types of assets can help reduce risk.
• Be prepared to put your money away for the long term: Many investors look for growth over at least 5 years rather than short-term market movements.
• You can choose how you invest: There are many different ways to put money in the markets, so pick your preferred asset and platform carefully.

The What: Different types of investments

Think of all the types of assets as different players who make up your investment team. The most common types are: Shares, Bonds, Funds, Alternative assets, Property, and Pensions.

What are stocks and shares?

Buy shares in a business and you own a tiny bit of that company. If it does well and becomes more profitable, the value of your shares may rise.

Some companies may also pay you income if you hold their shares, called a dividend. This is a payment made to you as a shareholder and comes from profits which you can take out (or reinvest if you prefer).

What’s the risk to me? The company could go bust (leaving you with nothing), your share price can fall (leaving you with a loss), or any dividends stop getting paid.

What could I gain if it goes well? If the company is a success, the value of your shares (and any dividends) could rise.

What are bonds?

Invest in bonds and you’re loaning your cash to a company or government – in effect, an IOU between you both.

In return, they promise to pay you a regular rate of interest – and give you back the amount you originally lent at an agreed date in the future, e.g. in five years. The price of a bond can go up and down like a share.

What’s the risk to me? If the company struggles, it could find it difficult to pay your bond interest – or default altogether and fail to return your original cash.

What could I gain if it goes well? Your bond value could rise, meaning you benefit from the interest and a greater return on your original investment.

What are funds?

Instead of buying shares in a single business, you could invest in a fund filled with hundreds of different companies instead.

Some of these individual companies may see their share price rise, others might fall or stay the same. But since your money is spread across so many firms in the fund, you’ll get the overall return rather than relying on the performance of just one.

Nor does a fund have to be full of companies, it could be packed with bonds, property or commodities such as metal or gold. Or the fund may be a mix of assets e.g. shares, property, bonds and even cash all together in one.

Popular fund types include:

• ‘Passive’ index funds: Set up to simply track the performance of a stock market index such as the FTSE 100 or S&P 500.
• Exchange traded funds (ETFs): A basket of different types of investments that can be traded on stock exchanges like individual shares.
• ‘Active’ managed funds: Run by professional investment managers who get paid to try and beat the market.

What’s the risk to me? Funds can do badly if markets tumble, and reduce the value of what you put in. Fees can also chip away at your returns.

What could I gain if it goes well? Your fund could perform well and boost the value of your investment. Funds also offer exposure to lots of different industries, sectors and geographic regions, helping you diversify your cash.

Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.

What are alternative investments?

Fine wine, art, collectables such as vintage toys, watches and even cryptocurrency. These all count as so-called alternative assets — and can help to widen your exposure away from more traditional investments such as shares and funds.

However, they tend to carry a very high price – much greater levels of risk and complexity. They would usually only make up a very small part of your portfolio, after you’ve made much broader investments in general stock markets.

What is property investment?

Property investing – separate to buying your own home to live in – involves buying into buildings, and is more commonly known as real estate. Your aim is to generate income or long-term growth.

The most common ways to do this are via buy-to-let, property funds or real estate investment trusts (REITs), and physical property development.

What is a pension investment?

While a pension might not be typically described as an investment asset itself, it may be the most visible window into the world of investing for some people.

One of the most common types is where you pay money in regularly, sometimes topped up by an employer. Your money is then used to invest for the long term until you retire.

The How: Understanding the principles behind investing

Investing vs saving: What’s the difference?

Consider savings as your defence – they need to be reliable, steady and ready for when you need them in a hurry. Investing is more of an attacking force, taking on much more risk in a bid for greater financial results as your reward.

In a nutshell, saving puts a premium on stability – protecting your lead – whereas investing is all about creating chances to push for growth.

Inflation also plays an important role. If the cost of living rises faster than the interest rate on your savings account (or rate of investment growth), your money may lose its ‘purchasing power’.

What are the risks of investing?

The value of investments can rise and fall, and you may receive back less than you originally invested. Common investment risks include:

• Market risk: The world’s stock markets can badly slip and slide during economic turbulence.
• Company risk: Individual businesses may perform poorly.
• Inflation risk: Your investment returns might not keep pace with rising prices.
• Liquidity risk: Some investments can be hard to sell out of quickly.
• Volatility: Huge price fluctuations can happen significantly over short periods.

What is diversification in investing?

Think of diversification as a financial version of building a balanced squad. Instead of leaning on one star player, it is widely considered that spreading your money across different types of investments can help to reduce your exposure to risk.

You can diversify by investing in different industries, UK and international markets, stocks and bonds, as well as property and alternative assets.

Be aware, though: diversification doesn’t get rid of risk altogether. However, it can help you to make it more manageable.

Disclaimer: eToro is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk. Terms and Conditions apply.

Why investing is for the long-term

Successful football clubs are rarely built overnight – and the same approach usually applies to investing.

While financial markets can fluctuate significantly in the short term, their rises and falls tend to be smoothed out over longer periods of time by years of economic progress.

While not a hard and fast rule, be prepared to put your money away for at least five years – this normally allows you to ride out volatile markets, benefit from compound growth and recover from any downturns.

Trading vs investing: What’s the difference?

Investing is like building and nurturing a club for long-term success – your focus is on getting stronger returns over many seasons, often involves holding on to your investment for years, and is linked to retirement or wealth-building goals.

Trading is instead similar to managing your team for immediate results – it focuses on short-term market movements, involves more frequent buying and selling, and can involve higher levels of volatility and risk.

The jargon buster: 20 key terms

Disclaimer: Your capital is at risk. The value of investments can go down as well as up. Past performance is not an indicator of future results. This content is for informational purposes only and does not constitute financial advice.