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The decision to start investing shouldn't be taken lightly, but if done well you could get much better returns than even the best savings accounts. Here, we go through everything you need to consider when investing in shares.

What should you consider before you start investing?

Deciding to invest in shares can be a little nerve-wracking, particularly if you don’t know much about the process. But that doesn’t mean you shouldn’t do it. If you spend some time asking yourself a few questions, you'll be able to work out how to invest money in a way that suits your finances.

1. Are you ready to invest?

The very first question to ask yourself is whether you have enough spare money to invest.Ìý

Investing involves risk, and while the ultimate goal is to make a lot more money than you put in, there’s no guarantee this will happen. In fact, you could end up with less.Ìý

For this reason, you should consider your current financial situation carefully. If you have a lot of unsecured debt, such as personal loans or credit cards, it’s best to pay these off first before you start investing.ÌýÌý

You should also make sure you leave enough cash in a normal account to pay for bills and other outgoings and have a large enough savings cushion to fall back on in an emergency. Ideally, this should be worth three to six months of your living costs.Ìý

2. How much can you invest?

When it comes to deciding how much you can invest, the golden rule is to never invest more than you could afford to lose.Ìý

You’ll also have to be prepared to be without the funds for a while. Investing is a mid- to long-term outlay, with some accounts there will be restrictions on when you can withdraw your money. Even if there are no restrictions, most investment products perform better over a longer term.

You should also think about how you want to invest your money. Investing one large lump sum isn't your only option; many investment platforms will let you drip-feed smaller amounts of money regularly which can be more manageable for your finances. For example, you might be able to start by paying in £50 a month.

3. How much risk are you willing to take?Ìý

The possibility of earning a decent return on your money comes at a cost - the most lucrative investments are also often the riskiest.

While a savings account with a bank or building society will give you back the money you put in as well as interest earned at a steady, agreed rate, investment products rarely guarantee you’ll get your capital back or what you’ll earn, but offer different levels of risk instead.

Deciding how much risk to take will depend on what sort of returns you expect and whether you can afford to lose the money you’re investing if it falls flat – if you can’t, make sure you go for a safer bet.

4. How much help and advice do you need?Ìý

We’re all different – some people prefer to manage their finances independently, wanting to understand every aspect of it and make their own decisions; others would rather pass the responsibility onto an expert in the hope that they’ll do a better job and cut out some of the hard work.

How much help you need will depend on how confident you are handling things yourself, how much time you have to spare, how much control you want, and whether you think an expert can make a difference to how well your investments succeed.

Execution only share dealing accounts will provide you with a platform to invest and little else. This is useful if you want to save money on fees, but only if you’re comfortable being in charge of your investments on your own.

If you do decide to get some advice from an Independent Financial Adviser, try ourÌý5-Step Plan to Finding an IFA You Can Trust with Your Money.

5. How much are you prepared to pay in fees?

When investing in shares, the major fee that you'll face is the dealing fee. This is what your stockbroker will charge you to do a deal for you.

The dealing fee is generally much lower if you use an online trading platform, but you may not get the advice on the decisions you're making that come with a stockbroker.

If you invest in funds rather than shares, you'll usually be charged an initial fee and an annual management charge by the fund manager. These fees can vary but will be based on a percentage of the amount you're investing.

6. What do you want to achieve?

There are two main things an investment can do: generate a regular income or build your capital over time.

For example, if you’re looking to boost the amount of spending money you have day-to-day, then you should be investing for income.

If you have a specific aim in mind, such as saving for retirement or making a large purchase in the future, investing for capital growth is the way to go.

7. How long do you have to invest?

If you’re considering putting your money into shares, you need to be looking at a five-year time span at the very least.

That’s because while shares generally rise over time, they also fall on a regular basis. Given a few years, markets tend to recover from the falls and grow again, but it means investments over shorter periods are far more likely to lose you money than ones over the longer term.

If you have less time or do not want to tie up your money for that long, then you would need to consider other options, such as savings accounts or shorter-term investments.

Bonus question: What do you want to invest in?Ìý

Another decision you’ll need to make is whether you want to put your money in shares through direct investment in the stock market or through pooled funds such as unit or investment trusts.

Shares are small pieces of a company that a board sells in order to raise capital. Shares are sold via the stock exchanges and are traded at prices determined by how popular a company is at a particular time.Ìý

The aim is to buy shares when they are at a low price, and sell them when their value has increased so you get a higher price - this is how you make money from them. But shares can also earn you money by paying out dividends – if a company makes a profit, as a part-owner they pay out some of this money back to you.

If you’d prefer not to choose your own individual shares, you could also choose to put money into a fund. Here, you give your money to a fund manager who pools it with money from other investors. This is then used to buy a group of shares in a stock market, although it can also include other assets such as bonds.Ìý

The advantage of choosing a range of investment types is that the risk is usually lower compared to picking individual shares.Ìý

On top of this, you will also need to consider:

• What sectors should you invest in? If possible, consider investing in sectors you have a knowledge of

• What markets should you invest in? It's a good idea to spread your risk, and make sure you don't invest too heavily in high-risk areas like emerging markets

How to manage risk when investingÌý

This is a big part of investing and will influence the investment decisions you make. If you invest in shares your capital will rise and fall according to how the markets and individual companies are performing.

If you can't cope with watching your hard-earned cash falling in value, investing in stocks and shares is not the right option for you.

However, even if you consider yourself very risk-averse, there are investments out there for you. But the more risk you're willing to take, the greater the potential rewards.

There are ways to manage the risk when investing in shares, including;

• Stop orders:ÌýThis is where you set the bid value and your broker will automatically offload your shares if they drop to that level. This gets you out of the trade before prices fall even further, where you'd make an even bigger loss.

• Trailing stop orders:ÌýThese update daily to follow movement in share price and limit your potential losses to a level you're comfortable with.

• Put options:ÌýThese reduce the risk of buying too high - or selling too low - by guaranteeing the price at which you can buy or sell shares.

• Call options:ÌýThese guarantee the price at which you can buy a particular asset, for a fixed period of time.

Our guide What's the best place for your money? outlines a number of options, including those for the risk-averse.

What are the tax implications?

There are a variety of taxes associated with investing that generally relate to the purchase and sale of shares, including:

• Capital Gains Tax:ÌýTax on the profit you make from an increase in the value of the 'capital' you invested in the shares or funds; in other words the growth in your initial investment. It is applied when you sell your shares. To find out more information regarding CGT, visit the gov.uk website.

• Stamp Duty Reserve Tax:ÌýTax applied to the sale of shares worth more than £1,000. Stamp Duty is charged at 0.5% on each document that needs to be stamped and is rounded up to the nearest £5.

• Tax on dividendsÌýIf you receive dividends from your shares, it's possible that you will need to pay tax on the income you receive. However, this will only be the case if you have already used up your annual income tax allowance.

You can pay less tax on your investments by using a Stocks and Shares ISA. This tax-efficient wrapper will allow your investments to grow free of capital gains tax and stamp duty. You will be able to take any income you receive from an ISA tax-free too.

You can save up to £20,000 this tax year (2021/22) in an ISA, all of which will be sheltered from the taxman.

You have a £2,000 tax-free dividend allowance, which means you can earn up to this amount from investment dividends without paying tax on it.

Consider alternative investments

Investing in shares is not the only option you have, and before you commit any money and start buying shares, it’s worth considering what other investment opportunities are out there.

Here are a few of the main alternatives you could consider:

• Invest in property - you can do this by buying property investment trusts as well as actual houses, shops and offices yourself

• Invest in bonds – where you lend money to a country or company. You are then paid a set amount when the bond matures, as well as regular interest paymentsÌý

• Try peer-to-peer lending – where you lend your savings to others and your money is repaid, plus interest, over a set term

You could even consider buying something that interests you, such as vintage cars, precious metals, art or fine wines. However, the value of these assets can fluctuate quickly, which makes them high-risk options, and sadly they don’t pay a regular income while you own them.Ìý

Managing your portfolio

Once you're sure that share dealing is the right option for you, and you've thought about the sort of investments you might make, you need to start thinking about starting your investment portfolio.

Before you start trading it's a good idea to use a test account so you can try your hand at investing and get to grips with the platforms before committing any money.

Most online brokers offer this facility without a charge, and it'll give you a chance to test your investing instincts before risking your cash.

How do you invest in shares?

You'll need to use a stockbroker to invest in shares, but there are a variety of ways you can go about choosing a broker to work with. You can get someone to advise you, someone to make your decisions for you, or someone who will simply make the trades for you with no advice.

The best option for you depends on how experienced you are, and whether you are after advice or not. These are the three main types of stockbroker you can use to buy shares:

• Discretionary stockbrokersÌýwill make investments on your behalf and make your portfolio decisions for you. The fee they charge is likely to be slightly higher than advisory stockbrokers.

• Advisory stockbrokersÌýwill offer you advice on the share deals you want to make. They can help you run your portfolio and you should stay in regular contact to ensure your portfolio is on track. You need to pay a 1-2% fee for their service.

• Execution only stockbrokersÌýwill action your trades but without giving any advice at all. These are best if you know what you're doing and don't want to pay for unnecessary advice. Execution only stockbrokers are also available online.

Should you use an online share dealing account?

Online share dealing accounts are the cheapest way to deal in shares. The brokers are usually execution-only, but will often have lots of information on their sites about how shares are performing, recent trends, areas to invest in and so on.

To use one, you’ll need to know what you are doing, and generally, you'll be running your own portfolio online, so you would need to access it for updates regularly.

The major advantage of an online share dealing account is that you can keep tabs on your portfolio wherever and whenever you want to.

However, most online trading accounts don't give any advice on whether it is a good idea to buy or sell a certain share - the company simply executes your trade for you.

When you compare cheap share dealing accounts, you should consider the following:

• The amount you will be charged for each trade

• Whether there are discounts for regular tradersÌý

• Whether the company has an online share dealing facility

• Whether the company charges an annual fee

• What assets and investments the service lets you trade in

• Whether 'mobile trading' is offered on your smartphone

• Whether the company has any introductory offers

While finding the cheapest share dealing accounts is important, it's also vital to consider the other benefits that a service may offer - such as ease of use or access to a virtual portfolio of your investment holdings.