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Investing isn't typically taught in school unless you've specifically studied finance or economics. This lack of education, combined with the overwhelming financial jargon and acronyms, can leave many people feeling lost and intimidated by the world of investing.

So, what is investing? How does it work? We’re taking it back to basics.
 

What are investments?

Investments are the action of depositing money into an asset, with the hope of generating a positive return. The core difference between investments and your savings account, is that unlike savings, investments can go up or down. 

In both instances, however, our money is always fighting against the rate of inflation, which is eroding the purchasing power of our cash over time.

So, even though your cash savings aren’t going down in your account, they may not be worth as much when you come to spend them. This is why solid growth in investments can be a better option long-term. 

Investors have a number of asset types 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; where the value of your investment is held within a property’s price.
• Commodities; 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. 

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How can I earn money from my investments?

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. 

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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Income and accumulation share classes 

In one direction, your gains may be paid back to you as an ‘income’ or ‘distribution’. This is the case for most individual shares or bonds. 

In the other direction, you have ‘accumulating’ shares. This is where an investor's potential gains are reinvested. The frequency of this reinvestment varies depending on the share. 

Income shares are well suited to investors who are looking to make an income from their investments, and accumulating funds for investors who want to focus on growing wealth long-term. 

An accumulating share can be a great option for the passive investor, as gains are reinvested without any action being required. 

These terms are often associated with investment funds, which are best thought of as baskets of shares. You can learn more about funds in our full guide.
 

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.

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