Regulation

FCA’s 5 Questions to Ask Before you Invest

If you make smart decisions then investing can be rewarding. Beyond making your money work harder, simply making good decisions can be satisfying. Doing research and acting on it can be rewarding, and not just financially. After you’ve put a little effort into it, there can be a real feelgood factor about investing, especially when things go well.

Making sure you know what you’re getting into and understanding both the opportunities and risks involved can help you make good decisions.

Trading apps on your phone. Ads on social media and YouTube. Tips from influencers and friends to get a piece of the action. The pressure to make quick decisions about investments has never been greater.

So, take all the time you need before deciding whether to go ahead with any potential investments. And, if you are investing for the long haul be prepared to invest through short-term ups and downs in the market, keeping your long-term goals in mind.

Here are 5 important questions to ask yourself before you invest.

1. Am I comfortable with the level of risk? Can I afford to lose my money?

Every investment carries some degree of risk, some higher than others. A good rule of thumb – the higher an investment’s potential return, the higher the risk of losing your money.

For some products, like savings accounts, the risk of losing your money is virtually zero, although it is worth remembering that the impact of inflation may be higher than the interest rate on your savings account. If this is the case, this will reduce the real value of your cash savings – i.e. what you can actually buy with your money.

But, particularly if you’re considering an investment that offers higher returns, ask yourself whether you’re prepared to risk losing some – or even all – of your money if things go wrong.

Above all, be wary of investments offering high returns, especially if you don’t fully understand the risks involved in complex products such as speculative mini-bonds and cryptoassets. To work out whether a return is high, consider it in relation to low-risk products such as cash savings accounts.

Our article on diversification explains the importance of selecting a range of investments to help you reduce risk.

2. Do I understand the investment and could I get my money out easily?

You need to fully understand what you’re investing in, especially if you’re targeting higher returns.

What is it? How does it work? Who is behind it? And how easy is it to get your money out if you need to? These are all important things to consider before you invest.

It’s vital you know what you’re putting your money into. Some investments are easy to get into but if your plans change, or you’ve been investing on a very short-term view, can you get out straight away, or are there limited ways to sell and get your money?

Do you know if other investors are buying or selling investments like yours on a daily basis, like on the stock market, and would you need to get the investment provider’s agreement before you could sell out?

High-risk investments can be appropriate in some circumstances but they’re more suited to people with experience in financial markets.

If you:

• are less experienced
• can’t afford to lose all your money
• don’t really understand the investment on offer

then high-risk investments may not be appropriate for you.

You may instead want to consider speaking to your employer about saving more into your workplace pension or saving into a well-diversified fund via a stocks and shares ISA.

3. Are my investments regulated?

We aim to ensure that firms engaging in regulated business treat customers fairly. But there are activities that we don’t regulate and in relation to which you may not have access to the Financial Services Compensation Scheme (FSCS) or Financial Ombudsman Service (FOS) if things go wrong.

Examples of unregulated activities

4. Am I protected if the investment provider or my adviser goes out of business?

The reality is that with high risk investments, there is no simple answer to this question.

Before you invest, it’s important to understand that you wouldn’t be protected simply because your investment performs poorly. But it’s also worth looking into which protections, if any, might be available to you in the event that your investment provider, or other regulated intermediary through which you deal, goes out of business.

In the UK, firms offering many financial services to you need to be authorised by us. Check the Financial Services Register to see which firms we authorise and what they’re authorised to do.

In general, if you use the services of a firm that is not authorised to provide them, you are likely to miss out on any possible protection from the FSCS or FOS.

What the FSCS and FOS do

5. Should I get financial advice?

Consider getting financial advice if you need help to understand the investment and both the risks and opportunities involved. An adviser can help you make a plan to hit your investment goals and recommend the right mix of investments based on your circumstances and the level of risk you’re willing to take.

Make sure any advisor you consider is regulated by us. Here are some tips on finding one, and some questions to ask.

High-risk, high-return investments can live up to their name. But they are only appropriate for investors who understand – and are willing to run – all the risks involved in the pursuit of higher potential returns.

It’s important to remember that these products are often best used by experienced investors, but there’s more information in our article on high-return investments.