What changes when you invest instead of save?

Saving usually means putting money in a bank, building society or credit union account that pays interest. The balance does not fall in pounds. The main risk is that interest does not keep up with inflation, so the money buys less over time. Deposits are protected by the FSCS up to £120,000 per person, per firm.

Investing means using money to buy assets, such as shares (part-ownership of companies), bonds (loans to companies or governments) or funds (which pool many people’s money to hold many assets). Returns come from income, such as dividends and interest, and from changes in price.

There is no guaranteed return. The value of investments can fall as well as rise, and you may get back less than you put in. Some investments can be sold quickly; others can take longer or have restrictions.

Investment prices can rise and fall sharply over months or years. The shorter the time before money is needed, the less time there is for a fall to be recovered, and it may not be recovered at all. Money that may be needed at short notice is exposed to whatever prices are at that moment.

Diversification means spreading money across many investments, such as different companies, industries, countries or types of asset, so that a problem with any one has a smaller effect on the whole. It reduces the risk from a single holding. It does not remove the risk of the whole market falling.

Investing usually involves charges: fund charges (the ongoing charges figure, or OCF), platform or account fees, and dealing costs. Charges are taken every year whether investments rise or fall, and their effect builds up over time because money taken in charges no longer grows.

The FSCS protects cash deposits up to £120,000 per person, per firm. For investments, it can pay up to £85,000 per person, per firm, but only if an authorised firm fails and cannot return your money or investments. It does not pay compensation for investments that simply lose value.

The FCA warns that if you invest in products it does not regulate, such as wine, whisky, land or precious metals, you will not be protected if something goes wrong and you could lose all your money.

ISAs and pensions are “wrappers” that change how savings and investments are taxed, not what they are invested in. A stocks and shares ISA shelters income and gains from UK tax; a pension adds tax relief but restricts when money can be taken out.

The balance between saving and investing depends on individual circumstances, such as when money will be needed, how much loss could be absorbed, emergency savings and any debts. Fundology provides information, not advice. MoneyHelper offers free, impartial guidance, and a regulated financial adviser can give personal advice.

Capital at risk. Past performance is not a guide to future returns. The value of investments can fall as well as rise. Tax treatment depends on individual circumstances and tax rules can change.