Where should you invest?
On the 2 February 2023, the Bank of England increased its base interest rate from 3.5% to four per cent, less than two months after its last 0.5% increase in December 2022 – a reaction to the continued rise in inflation, which is near 10%. Whilst increased rates should in theory lead to higher rates on savings accounts, many major high street banks aren’t passing the base interest rate onto their customers. This means that until inflation is brought under control, money sat in easy-access savings accounts is still losing value in real terms. As a result, investing this money and preserving its value has become an increasingly attractive option. There are a range of investment opportunities that can be accessed by the everyday consumer, so if you haven’t already considered investing in your future – now could be the time.
An ISA, or Individual Savings Account, is a tax-free savings or investment account that allows you to put your ISA allowance to work and maximise potential returns you make on your money. There are different types of ISAs for different goals, such as those designed to hold various investment assets (stocks, shares, and bonds), simple cash ISAs on a fixed interest rate, and Lifetime ISAs specifically for saving – where the government adds a 25% bonus to your account each year (£1,000 maximum).
ISAs are commonly available from banks and buildings societies, but can also be available through stockbrokers and other financial institutions. It is worth noting that yearly limits/benefits follow the financial rather than calendar year, so all investments need to be made before the new tax year begins each April to start reaping the annual rewards.
Pros: The biggest advantage to an investment ISA is that users don’t put any income or capital gains tax (CGT) on them. Even with a stocks and shares ISA, investors won’t pay tax on any dividends. Some varieties also enable you to withdraw money without paying any penalties.
Cons: Although ISA interest rates differ based on the institution offering them – with Virgin Money offering an Easy Access Cash ISA at 3% AER – many rates dropped as a result of the economic uncertainty created during and after the pandemic, so they aren’t the investment opportunity they once were. Furthermore, the maximum amount you can invest in ISAs is limited to £20,000 during the financial year, which could leave too little scope for some investors.
With a reputation for being a more stable investment, property investment is frequent in the UK and goes beyond simply owning your own home. Whilst that is still technically an investment, those with the financial capability may look to buying other properties on a buy-to-let basis enabling them to grow a strong investment portfolio. If investing in the short-term, you could look to buy a property and renovate it, selling it on for a profit dependant on the housing market.
Pros: Whilst early 2023 predictions point toward a fall in UK house prices, this could present a great opportunity for investors. As reported by MoneyWeek, both Lloyds Bank and Halifax have predicted an eight per cent drop in house prices this year so investors could pick up a real bargain now, with the house market expected to recover over the next two years. Furthermore, the demand is higher than supply in terms of rental properties, meaning rent prices are strong – another good opportunity for long-term buy-to-let investors.
Cons: Investing in property and becoming a landlord puts you in a position of responsibility. Whilst you will likely hire an estate agent to take care of it day-to-day, you will be liable for any necessary maintenance and repairs required. If you own a home, you will also be required to pay a 3% stamp duty surcharge on any property you buy. Furthermore, when selling second homes or buy-to-let properties, capital gains tax (CGT) is charged. Basic-rate taxpayers will be charged 18% on sales profits (rather than the full sale amount), whilst if your other investments and salary take you into a higher tax bracket, you will pay 28% in CGT.
The currency exchange, otherwise known as Forex, allows for currency trading 24 hours a day, seven days a week, as the world’s largest liquid asset market. Currencies are traded against one another in pairs, such as Euros and US Dollars, and much of the trading activity is centred around the world’s widely-used currencies. Whilst the aforementioned currencies are popular investments, others include the Swiss Franc (CHF), an attractive opportunity because of Switzerland’s stable economy, high GDP, and advanced banking system. Trading in currency pairs is a popular method for investors, and major pairs often include the U.S. Dollar alongside British Pounds, Euros, and Japanese Yen, where currencies can fluctuate according to each other.
Pros: With currency trades happening all over the world within the foreign exchange market, it is effectively always open from one time zone to the next, and all happens electronically. This makes it a highly accessible investment opportunity and convenient, as investors can enter or exit the market in seconds. Across the various types of investment, currency exchange has some of the lowest associated costs and fewer commissions, meaning investors will keep more of their returns.
Cons: Like most investments, there is a certain level of risk involved. Volatility in currencies is the biggest drawback here, as many can be impacted not just by events local to that currency, but by events happening across the world. Some currencies are also linked with happenings in the stock exchange, so investors have to pay attention to a wide range of details.
Cryptocurrencies, such as Bitcoin, are digital assets that use peer to peer payment methods without the need for third parties such as banks to take a transaction fee. Bitcoin and other crypto do not have a physical coin and exist virtually, but more and more companies are starting to accept it as a form of payment. Blockchain technology is used to transfer cryptocurrency, and it is essentially a secure network of computers that have access to every transaction – they can validate them and update the system as needed.
Pros: Anyone can invest in crypto, and it doesn’t require a large sum of money, although your returns are relative to the level of investment. Transactional fees are low compared to other opportunities, and the transactions themselves can be done quickly and efficiently. While cyber theft is a possibility, there are crypto wallets available to store your money securely – designed to ensure access is granted solely with a private key.
Cons: The cryptocurrency market is extremely volatile, and investors are advised only to invest what they can afford to lose. Cryptocurrency is still in its infancy and a number of factors, from demand to media hype, can cause large price fluctuations in a single day and put your investment in real jeopardy. Furthermore, the market isn’t regulated by the Financial Conduct Authority, and you won’t be protected by the Financial Services Compensation Scheme if your currency provider shuts down and you lose your outlay.
The stock market is where public companies issue their shares. You can buy shares in a company at its current market price, and if said company improves its performance, the share price goes up, enabling you to sell your shares for a profit as they are worth more. It is a popular method of investment around the globe, but whilst better performance can improve share prices, a national or international incident could damage them – negatively affecting your investment. In the UK, the 100 largest public companies are listed in the FTSE 100, where stocks and shares are traded each day on the London Stock Exchange.
Pros: Historically, the stock market has steadily grown at a bigger rate than inflation, so even if your share price drops initially, you could still see your shares result in profit if you remain invested over the long term. The market can be used actively too, such as day trading, and both methods can result in great returns, so this type of investment has broad appeal. You can also invest smaller amounts of money as you develop your market knowledge.
Cons: The stock market can still be volatile, and seeing a company perform well previously doesn’t mean it will do the same in the future. Investment in ‘safer’ companies will likely ensure you don’t lose the money you put in, but the returns won’t be particularly high. Taking more risk means you could receive much bigger returns, but there is also the possibility that you lose your investment completely. The market is a delicate balance between risk and reward, and something as simple as a poorly-worded press release could affect a company’s share price.