Step 4. Understand what you would own
Investing means putting money into an asset with the aim of receiving income, growth or both. A share is a small ownership stake in a company. A bond generally means lending to a government or organisation. A fund holds a collection of investments.
An ETF is a fund bought and sold on a stock exchange. An index fund aims to follow a market index and can be an ETF or another type of fund. Not every ETF is broad: some focus on one industry or even one company.
Accessible savings and investments serve different purposes. Investments can fall in value, and a company or borrower can fail. Pause if you cannot explain what you would own and how it might make or lose money.
Step 5. Match the risk to your timeframe and finances
Ask both how you would feel if your investment fell and whether your finances could cope. Being willing to take risk is not the same as being able to afford a loss.
If you need the money soon, a fall could disrupt your plans. More time may give you flexibility to live through market falls, but never guarantees a profit. Some investments never recover.
An exampleImagine €1,000 becoming €800 — a 20% fall. Would you need to withdraw it, rush to sell or be able to review calmly? This is an example, not a prediction or a maximum possible loss.
Step 6. Avoid depending on one company or industry
Diversification means spreading your money across different investments so one problem does not determine your whole result. It can reduce some risks, but does not prevent losses when markets fall.
Five companies in the same industry may face similar problems. Several funds may hold the same companies. Look at the underlying businesses, industries, countries and investment types, not just the number of holdings.
- If one company or industry struggled, how much of my money would be affected?
- Do my funds hold many of the same investments?
Investing involves risk and you can lose money. This guide explains the basics rather than recommending investments. New words? See the investing glossary.