The Importance of Investing in Shares

Investing can be scary. Many people are more content to just leave their hard-earned money safely in the bank or a building society rather than invest it in stocks and shares that have the potential to increase or decrease on a daily basis.

But investing in shares is very important. Failing to do so can cost you boatloads of money down the road. In fact, hundreds or even thousands of pounds can be lost by those that are too worried or scared to invest.

The importance of investing in shares is discussed in greater length below. If you live in the United Kingdom, then you definitely want to read up so you can put these tips and pieces of advice into action.

Types of Assets

Before expounding upon the importance of investing, it is necessary to first take a look at the types of assets that you can put your money into.

The five main types of assets include cash (such as a savings account), bonds (a large loan), property (residential or commercial), equities (shares in companies), and commodities (copper, tin, coffee, etc).

When it comes to assets, there is a general rule of thumb that is wise to keep in mind. Simply put, assets that contain more risk almost always put up a higher return than those that are less risky. This is especially true of long-term returns as opposed to short-term returns.

For example, cash in the form of a savings account is by far the safest asset to invest in. There is little chance of losing money with a cash investment but you will also earn the lowest return out of the five main assets. Equities and commodities are generally the riskiest assets (due in large part to their constantly fluctuating returns and values) but almost always offer up the highest returns over the long-term.

Long-Term Returns

Taking a look at long-term returns can help illustrate just how beneficial and effective investing in shares and stocks can be. It can also help you see just how much more of a return an investment in a riskier asset like equities can net you than an investment in a less risky asset like cash.

The average annual return for cash over the past fifty years has been 2 percent. If you invested £1,000 in cash investments fifty years ago, that investment's value would now be at £2,692.

On the other hand, the average annual return for equities over the past fifty years has been 5.7 percent. If you invested £1,000 in equities investments fifty years ago, that investment's value would now be at £15,752.

As you can see from the figures above, investing even just £1,000 (or less) in assets can make you some serious money back. Furthermore, these figures take inflation into consideration so that original £1,000 investment is worth much more today as far as buying power is concerned than it originally was.

When to Invest

If you are beginning to understand the importance of investing in shares, then you might also be wondering when you should start to invest in them yourself.

The answer is different for everybody. The right time to invest depends on a number of personal factors, including but not limited to your age, the amount of money you have, and your future plans.

Perhaps the most important factor to consider is the length of time in which you would like to invest. If you only want to invest for a year or two, then cash assets are the route to go and you should begin to invest immediately. If you want to invest for a longer period of time, say over three years, then investing in shares will be your best bet. You can generally begin investing in shares today but it is usually wise to talk to a financial advisor first to set up a solid game plan.

A good rule of thumb is to invest as early as possible. Of course, you shouldn't invest all of your money. You should have a safety net, an emergency savings account, with around six months' worth of salary stocked up. The rest of your money can be doled out among various assets as investments.

Remember that the earlier you invest in long-term assets, the longer they will have to build and the higher the returns will eventually be.

The world of investing can be confusing, especially to those that are new to it. Fortunately, it isn't very difficult to sort through the murk and learn to start investing in shares. The information related above shows you just how important investing in shares can be and why you should start sooner rather than later. It should give you the tools that you need to begin this exciting new financial chapter in your life.

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