Understand the Risks

Is investing right for me?

This should be the first question you ask yourself before making any investment decisions. As all investments involve a degree of risk, you should really be thinking about investing for the medium to long-term – to smooth out the ups and downs of the markets. If you can’t make a commitment of 5 years of more, investing may not be appropriate for you.

It may be the case that in the long term your investment could provide a better return than savings, however risk and reward go hand-in-hand and you should be willing to accept this risk before making an investment.

Understanding risk

  • The value of any investment, and the income from it, can go down as well as up and you may get back less than you originally invested.
  • When you’re researching stocks, it’s important to understand that the past performance of any investment is no guarantee of how it’ll perform in the future.
  • Tax laws can change and any tax advantages will depend on your individual circumstances.

Managing risk

One of the ways you can try and manage risk is to diversify – spread your investments across a range of markets, sectors and investment types. You could also try to invest smaller amounts regularly, rather than as a single lump sum – investing regularly over a longer period of time can help smooth the ups and downs of the stock market.

It is, however, important to remember that nothing’s guaranteed and you could lose some, or all, of your money whatever the level of risk.

What are the risks involved with international shares?

Dealing on foreign markets will involve different risks from UK markets - in some cases the risks may be greater.

Risks

Culture

Language and cultural differences between the UK and foreign markets may mean that there is a lack of information, or difficulty in obtaining information you may consider important to your trading decisions.

Currency Risks

Any potential profit or loss from your trade in foreign markets may be affected by fluctuations in foreign exchange rates.

Economy and Politics

Economic or political factors such as inflation or interest rate fluctuations in the UK could affect overseas markets. The general economic outlook and market conditions may differ considerably between the UK and foreign markets causing them to be less – or more – favourable.

Emerging Markets

Emerging markets tend to be less developed than in the UK leading to greater volatility in securities pricing. The value of your investments could, as a result, change quickly.

Shareholder Rights

You may find, as a shareholder, you are excluded from some shareholder rights and benefits because you are resident in a different jurisdiction from that of the company you have invested in. An example would be participating in corporate events such as a Rights Issue. You may find you are not treated in the same way as other shareholders and could suffer losses as a result.

Taxation

Tax laws overseas differ from those in the UK. Tax authorities in many countries will take a larger amount of tax than they would in the UK because of higher rates. Remember that ISAs and SIPPs will only shelter you from UK tax. How tax is calculated abroad could therefore affect the value of, and returns from, any foreign investments.

Trading and Settlement

Foreign markets may trade at a lower volume than in the UK and this reduced liquidity may make it more difficult to sell shares you have bought. It could also cause delays with settlement.