Most of us are taught how to save. Far fewer of us are taught how to invest, even though, over a working lifetime, the difference between the two is usually the difference that matters most.
Owning, not lending
When you put money in a savings account, you are lending it to a bank. The bank pays you interest for the privilege, and you get exactly your money back, no more, no less.
When you buy a share, you are doing something different: you are buying a small piece of a real business. If the company sells more, earns more and becomes worth more, your piece becomes worth more with it. Many companies also pay out part of their profits to shareholders each year as dividends, your share of what the business earned.
Two ways your money grows
Shareholders are rewarded in two ways, and good investors think about both:
- Income, dividends paid out of profits, typically once or twice a year. Reinvested, they buy you more shares, which earn more dividends.
- Growth, the value of the business itself rising over the years, as profits compound and the company expands.
Put those together and reinvest along the way, and you get the effect that makes long-term investing work: compounding, growth earning growth. It looks unremarkable over one year and remarkable over twenty.
What that looks like in practice
Here is £1,000 left alone at different annual rates of return. The point is not the precise numbers, markets do not move in straight lines, but the shape: time multiplies the difference.
| After | 2% · cash-like | 5% · modest | 7% · equity-like |
|---|---|---|---|
| 10 years | £1,219 | £1,629 | £1,967 |
| 20 years | £1,486 | £2,653 | £3,870 |
| 30 years | £1,811 | £4,322 | £7,612 |
Illustrative only, before fees, tax and inflation. Past performance is not a guide to future returns, markets fall as well as rise.
The price of growth is patience
Why doesn't everyone just invest, then? Because the stock market does not pay 7% smoothly. Some years it rises 20%; some years it falls 20%. The reward for living with that uncertainty is precisely why returns from shares have, over long periods, beaten cash.
This is why time horizon is the first question every investor should ask. Money you'll need in two years probably belongs in savings. Money you won't touch for ten or twenty is where investing earns its keep, long enough to ride out the bad years and let compounding do its work.
Key takeaways
- 01A share is part-ownership of a real business, not a ticket in a game.
- 02Returns come two ways: dividends and growth. Reinvested, they compound.
- 03Time is the investor's biggest advantage: compounding rewards decades, not weeks.
- 04Match the money to the horizon: savings for soon, investing for someday.
This guide is educational and general in nature. ShareSoc is not authorised to give individual financial advice. If you're unsure what's right for your circumstances, speak to a regulated financial adviser.