You may have been told that you should "invest" your money. You may understand this as using your money to make more money. But what exactly is investing, what do you invest in, and how can you get started?
Here's our quick guide to investing.
Key Concepts in Investing
Before you jump into the world of investing, let's get familiar with some key terms and concepts. Don't worry, we'll keep it simple and easy to understand.
Here's your vocabulary list for investing.
Capital
Capital is the money you invest. However capital can also be another resource, but since resources are worth money, capital is what you have to invest in.
Return on Investment (ROI)
Return on investment is a concept used in finance, economics, and business to indicate the success of an investment.
Your investments can either make you money or lose money. These profits and losses can be mathematically compared to the initial investment and expressed as a percentage.
After all, making $10 by spending $1000 isn't mathematically as good as making $5 by paying $50. Sure, it's twice as much money, but the latter has less inherent risk compared to the initial investment.
Risk
No investment is free of risk. In the earlier example, the latter had a higher return on investment (ROI), but you should know that higher potential returns typically come with higher risk.
Everybody's different, and each person has a different tolerance for risk.
To be clear, no matter what anybody says, every investment comes with some risk.
Diversification
An effective strategy to minimise and mitigate risk is diversification. Diversification involves investing in many different things, usually unrelated investments, to protect yourself against losses.
If one investment performs poorly, the others may still perform well. It's a case of putting only some of your eggs into one basket.
The Different Types of Investments
Those new to the investing world might think that we're just talking about stocks or shares. However, there are several types of different financial products that you can invest in.
Here are just a few of them and what they are.
Stocks
Stocks or shares are part-ownership of a company. When you buy a share, you buy part of the company.
You essentially have a piece of the pie, and if the pie's bigger, so is your piece.
Bonds
A bond is a type of debt security in which investors earn interest. A "security" is essentially a tradable financial asset.
Companies and governments issue bonds, which are a way to borrow money. The people who invest in the bond fund the loan. Over time, the issuer pays the investor an interest or coupon rate.
At the end of the bond, the initial investment is returned. This is known as the bond maturing.
Bonds are typically low-risk and a good way for investors to diversify. However, the issuer could default on their payment.
Real Estate
Real estate or property is another type of investment. Properties can either increase in value over time or be used to generate income through rent, either as a residential or commercial property.
Mutual Funds
A mutual fund pools together various investors' money and is a share in a range of securities.
Mutual funds are already diversified and managed by somebody else, ideally somebody or an entity that knows what they're doing.
Exchange-Traded Funds
Exchange-traded funds, or ETFs, are similar to mutual funds but are traded on stock exchanges in the same way that individual stocks are.
Commodities
In finance and economics, commodities are some of the most "real" things. Commodities include physical goods and resources like gold, oil, and agricultural products.
You can invest in these either directly or by investing in particular ETFs.
Cryptocurrencies
One of the newer kinds of securities, cryptocurrencies, are digital or virtual currencies, and investors can buy them. If the value of their cryptocurrencies increases, they can make a profit when they decide to sell them.
Savings Accounts and Certificates of Deposit (CDs)
Savings accounts and certificates of deposit (CDs) are a type of investment that banks typically offer. Placing your money in a savings account can generate interest over time.
Why You Should Invest
You may have people you know suggesting that you invest. The most obvious reason is to make or have more money, but what are the real reasons to invest?
Wealth Growth
One of the most exciting aspects of investing is the potential for wealth growth. By diversifying your investment portfolio, you can increase your financial security and potentially make significant gains, even during economic downturns.
For Retirement
Investing can be a powerful tool for retirement planning, offering a financial safety net for your post-working life. Knowing that your investments can provide you with a comfortable retirement is reassuring.
Knowing that your everyday income will stop once you retire, it can not only be financially wise to invest for retirement but also reassuring to know that you'll have something when you do.
To Generate Income
Investing isn't just about the future; it can also generate income in the present. Whether it's through stocks, bonds, real estate, or other securities, investing can provide you with recurring payments, adding to your current earnings or even becoming your primary source of income.
You can add this additional income to your current earnings or even use it as your primary source of income.
Counteract Inflation
Inflation typically makes things more expensive; investing wisely is an excellent way to counteract this.
After all, if you put your money in a piggy bank and take it out ten years later, you'll find that your $10 won't buy you as much stuff as it did then.
By investing, you won't have $10; you should have more, which means that your initial investment is at least worth the same as when you started.
The Different Types of Investment Strategies
There are different things to invest in and different reasons to invest, which gives us different strategies for investing.
Consider different potential investment strategies depending on what you invest in and what you're investing for.
Here are a few common investment strategies to get you started.
Long-Term Investment
For investing for retirement, you may be interested in a long-term investment strategy that prioritises long-term growth over an immediate and potentially risky return on investment.
Short-Term Investment
Short-term investment tends to favour buying and selling securities across shorter periods. Investors attempt to play the market, using the fluctuations in said markets to their advantage.
Value Investing
Value investing involves buying something at a value lower than its intrinsic value. Think of it as picking up a bargain.
Growth Investing
Growth investing is a strategy in which the investor chooses to invest in companies or securities expected to grow at an above-average rate.
Income Investing
Income investing involves choosing securities and financial products that will likely provide a regular income through interest payments or dividends. Investors naturally prefer this strategy to bolster or replace their regular income.
Dollar-Cost Averaging
Dollar-cost averaging is an investment strategy when you invest a fixed amount of money regularly.
Things to Think About When Investing
Before you start investing, remember that it comes with risks and isn't a magic solution to generating more wealth.
You need to understand your own risk tolerance, how much risk you're willing to take, and, most importantly, how much risk you can take.
You must also consider how long you'll invest and when you should stop.
It would be best to have clear financial goals and understand market conditions so that you can invest effectively.
Lastly, but most importantly, you need to understand the fees and taxes involved in investing to ensure that you can afford it and that you'll also be on the right side of the law!
How to Get Started with Investing
Now that you've been quickly introduced to the world of investing, you might want to get started.
Before you dive in, make sure you do your research and learn as much as you can before you start. In the world of investing, knowledge is power.
From there, you can set financial goals and research which brokerages are best for buying and selling securities.
You can then plan your investments, and once you've invested, make sure you monitor them.
Finally, get help if you need it. You can speak to financial investors or learn more about finance and economics with private tutors.
You can search for private tutors on the Superprof website and browse tutors' profiles across New Zealand and all over the world. Your tutor doesn't necessarily need to live in your local area, thanks to online tutoring.
Enjoyed this article? Leave a rating!
Loading...
