If you are thinking about putting money in the stock market, how do you choose the investment that is right for you?
There are a vast array of shares and funds to pick from, and the choice can often seem daunting.
Here is a step-by-step guide to working out the most suitable options.
1. Is the stock market right for me?
First, work out whether you should be investing in shares at all.
The stock market is risky and if your investments do badly you could lose a lot – or even all – of your original capital.
Generally, stock-market investments suit people who have a long timeframe – at least five years, and preferably 10 or more – to let their money grow.
If you’re saving for a holiday in a couple of years’ time, the markets would probably not be a good idea. But over much longer periods, stock market investments are more likely to provide better returns than cash savings accounts, say.
Guide to the basics of investing.
2. What is my attitude to risk?
The next step is to assess how much risk you are willing to take on.
Buying shares in just a handful of individual companies tends to be a very high-risk approach, as the failure of one of these businesses could leave you facing big losses.
Risk can be reduced by investing in a wide range of shares, and this is most easily done through a fund. But some funds carry more risk than others: for example, a higher-risk fund may invest solely in smaller technology firms or businesses based in emerging economies such as India or Brazil.
Lower-risk funds might concentrate on larger blue-chip companies based in established economies such as the UK and US.
Broadly speaking, the longer you plan to leave your money invested, the more risk you should consider taking on.
Find out more about investment risk.
3. Do I need an income?
Many people invest in the stock market for the long-term but plan to make regular withdrawals from their holdings – this is particularly the case for retired people who need an income to live on after they stop working.
Some investment funds focus on shares which pay regular dividends – again these are normally large, long-established companies – to cover such income requirements.
If you invest in riskier funds and they lose value, you may find the amount of income you are able to take falls, or that your capital is depleted too quickly.
Could you be sitting on a fortune?
4. Should I seek advice?
Online investment platforms provide a lot of information about the funds they offer, such as how risky they are and what shares they hold. But if you are uncertain about what approach to take, it may be a good idea to seek professional help from an independent financial adviser (IFA).
They will generally charge you a fixed fee for advice: this is likely to be hundreds of pounds. To find an IFA near you, visit www.unbiased.co.uk.
Read Annie Shaw's guide to common investment mistakes.
For more news and useful information, browse our money articles.