Most people hear “investing” and picture someone in a City of London office staring at six screens of flickering numbers, barking orders into a phone. That image is about as relevant to your financial life as Formula 1 is to your commute.
Investing, at its simplest, is putting your money somewhere it can grow. You already do a version of this if you have a savings account — you are lending your money to the bank, and they pay you interest for the privilege. Investing in the stock market is the same principle with a different engine: instead of lending to a bank, you are buying tiny pieces of businesses that make products, employ people, and (over time, on average) generate profits that make your pieces worth more.
The reason most people do not invest is not that it is too complicated. It is that nobody explains it simply enough, and the financial industry has a vested interest in making it sound harder than it is, because complexity justifies fees.
What You Are Actually Buying
When you buy a share (also called a stock or equity), you are buying a small piece of a company. If the company does well, your share becomes worth more. Some companies also pay dividends — regular cash payments to shareholders from the company’s profits.
When you buy a bond, you are lending money to a government or company. They pay you interest at a fixed rate for a fixed period, then return your original sum. Bonds are generally lower risk than shares, but the returns are usually lower too.
When you buy a fund, you are pooling your money with other investors to buy a basket of shares, bonds, or both. Someone (or something) decides what goes in the basket. This is where it gets relevant for beginners, because funds are how most people should start investing.
Index Funds: The Starting Point
An index fund tracks a specific market index. The FTSE 100, for example, is an index of the 100 largest companies listed on the London Stock Exchange. A FTSE 100 index fund buys shares in all 100 of those companies in proportion to their size. When the index goes up, your fund goes up. When it goes down, so does your fund.
A global index fund does the same thing but across the whole world — thousands of companies across dozens of countries. This gives you automatic diversification: you are not betting on one company, one industry, or one country. You are betting on the global economy continuing to grow over the long term. Given that it has done so through two world wars, multiple pandemics, financial crises, and every other catastrophe imaginable, that is a reasonable bet, though never a guaranteed one.
Why index funds rather than picking individual shares? Three reasons.
First, diversification. If one company in an index goes bust, it barely registers in a fund holding hundreds or thousands of others. If you put all your money in one company and it goes bust, your money goes with it.
Second, cost. Index funds are managed by algorithms, not teams of analysts. Annual fees are typically 0.1% to 0.3%, compared with 0.5% to 1.5% for actively managed funds where a professional fund manager picks the investments. That fee difference sounds small, but over 30 years on a £200-per-month investment, the difference between 0.2% and 1.0% in annual fees is roughly £30,000. That is real money lost to fees rather than working for you.
Third, performance. This is the one that surprises people. Most actively managed funds underperform index funds over the long term. Study after study, including the widely cited SPIVA research, shows that over 15 to 20 year periods, around 85 to 90% of actively managed funds fail to beat their benchmark index. You are paying more for worse results. There are exceptions, but identifying them in advance is extraordinarily difficult, and the evidence overwhelmingly favours the low-cost index approach for the majority of investors.
How to Actually Start
The mechanical process of investing is now remarkably simple. Here is what you do:
Step 1: Open a stocks and shares ISA. This is your tax-free investment wrapper. I cover ISAs in detail in a separate article, but the short version is: any growth inside the ISA is free from income tax and capital gains tax. You can invest up to £20,000 per year across your ISA allowance.
Step 2: Choose a platform. Some of the main options for UK investors:
Vanguard: Low fees (0.15% platform fee, capped at £375 per year). Limited to Vanguard’s own funds, which are excellent. Good starting point.
InvestEngine: Zero platform fee for its managed portfolios. Simple interface. Good for beginners.
Trading 212: Zero commission on trades, no platform fee on its ISA. Wide range of investments. Popular with younger investors.
AJ Bell: Slightly higher fees but broader range of investments and good tools. Better as your portfolio grows.
The differences between platforms matter less than the act of opening one. If you spend three months comparing platforms and never invest, you have lost three months of compounding for no gain.
Step 3: Choose a fund. For most beginners, a single global index fund is sufficient. Something tracking the FTSE Global All Cap Index or the MSCI World Index gives you exposure to thousands of companies worldwide. You can diversify into more specific funds later as you learn more, but a single global fund is a perfectly respectable long-term portfolio on its own.
Step 4: Set up a regular investment. Most platforms allow you to set up a monthly direct debit that automatically buys your chosen fund. This removes the temptation to time the market (which does not work — I will come to that) and means you benefit from pound-cost averaging: buying more units when prices are low and fewer when prices are high.
Step 5: Leave it alone. This is the hardest step and the most important. Do not check your portfolio every day. Do not panic when the market drops. Do not try to sell before a crash and buy back in at the bottom — professional fund managers with decades of experience and teams of analysts cannot do this consistently, and neither can you.
Risk and Time
Investing involves risk. The value of your investments can fall. In 2008, global stock markets dropped roughly 40%. In March 2020, they fell about 30% in a few weeks. If you had invested £10,000 the day before either of those crashes, your portfolio would have been worth £6,000 or £7,000 within months.
But here is what happened next. After the 2008 crash, markets recovered to their previous peak within about five years and then continued rising. After the March 2020 crash, recovery took less than six months. If you held your nerve and did not sell, you lost nothing. If you continued investing through the downturn, you bought shares at a significant discount.
This is why time horizon matters. If you need the money within one to three years, do not invest it in shares. Use a cash savings account. The risk of a short-term drop is too high relative to the time you have to recover.
If you are investing for five years, shares become more attractive. Over any rolling five-year period in the UK stock market’s history, the probability of a positive return has been around 80 to 85%.
If you are investing for 10 years or more, the odds shift further. Over any rolling 10-year period, the probability of positive returns climbs above 90%. Over 20 years, there has been no period in modern UK market history where a diversified investor lost money in real terms.
This is the advantage young people have that I keep coming back to in the Time — The Money Superpower eBook. A 20-year-old investing for retirement has 45 years. That is enough time to absorb multiple crashes and still come out ahead. A 55-year-old does not have that luxury.
Why Timing the Market Does Not Work
At some point, someone will tell you to “wait for the dip” or “sell before the crash.” It sounds logical. Buy low, sell high. The problem is that nobody, including professional investors, can consistently predict when the highs and lows will occur.
Missing just the 10 best days in the stock market over a 20-year period can cut your returns by more than half. Those best days often cluster around the worst days — they tend to occur during periods of extreme volatility when most people are panicking and selling. If you are out of the market trying to avoid the bad days, you almost certainly miss the good ones too.
The evidence consistently shows that time in the market beats timing the market. A boring, automatic, monthly investment into an index fund, held through every crash and recovery, outperforms the vast majority of attempts to trade in and out.
What About Crypto?
Cryptocurrency is not investing in the traditional sense. It is speculation. There is no underlying business generating profits, no dividend, no intrinsic value beyond what the next buyer is willing to pay. That does not mean you cannot make money from it — some people have made extraordinary returns. But many more have lost money, sometimes catastrophically.
If you want to speculate on crypto with money you can genuinely afford to lose entirely, that is your choice. But do not confuse it with investing, and do not let it be the reason you delay opening a stocks and shares ISA. The boring index fund will, over 20 years, almost certainly outperform a crypto portfolio, with a fraction of the risk and none of the sleepless nights.
Crypto is not regulated by the FCA in the same way as other investments, your funds are not covered by the FSCS, and the tax treatment can be complicated. If you do trade crypto, keep records of every transaction for HMRC purposes.
Jargon Decoder
A few terms you will encounter:
Equities: another word for stocks and shares
Portfolio: your collection of investments
Diversification: spreading your money across different investments to reduce risk
Volatility: how much the price moves up and down — high volatility means bigger swings
Bull market: a period when prices are generally rising
Bear market: a period when prices have fallen 20% or more from a recent peak
Yield: the income (dividends or interest) an investment generates, expressed as a percentage of its price
Capital gain: the profit you make when you sell an investment for more than you paid
Getting Started This Week
If you have read this far and are still thinking about it rather than doing it, here is the nudge: open a stocks and shares ISA today. Most platforms take less than 10 minutes to set up. Deposit £25, or £50, or whatever you can spare. Buy a global index fund. Set up a monthly direct debit. Then close the app and get on with your life.
You do not need to understand every detail before you start. You will learn as you go, and the best education in investing is owning investments and watching how they behave over time. What matters right now is not perfection. It is starting.
The Money Sorted book and the Investment Fundamentals course cover risk assessment, asset allocation, pension investing, and portfolio management in much greater depth.
This article is part of the Money Sorted series on moneysorted.money. For more on building wealth, explore the full range of articles, courses, and eBooks.