What is investing?
Investing means buying an asset with an intention to generate income in interest income or capital gain. Capital gain means buying an asset at a lower price and selling at a higher price.
Investing is not just limited to buying assets. Buying businesses with an intent to earn cash flows from it also amounts to investing.
Why should you invest?
- Creation of source that can earn you an active income: Many people invest their money on businesses or real estate or securities like stocks, bonds etc. with an intent to earn cash flows in the nature of profits or rental income or dividends or interest income etc.
- Creation of an asset (write why having an asset is important?): Everyone knows that money loses its value over a time due to inflation. But an asset like real estate or a business that consistently generates increasing cash flows doesn’t lose its value, instead the value of an asset increases over a time. Which is why rich people thrive to create more assets to beat inflation and never lose value.
- Can be seen as financial backup: For instance, you are a salaried employee who works at a company or some place of business. There is a possibility that you may lose your job for whatever reason it might be. In times like this, if you have an asset that generates your cash flow you may not feel stressed. Having an asset provides you with security as well as peace of mind.
- To grow your wealth: The most common reason for investing is wealth creation. People want to be rich. It could be investing in real estate or highly potential stocks or mutual funds or any other instruments. The motive is to have wealth. Wealth isn’t liquid money, it’s in assets. The more assets you have, the wealthier you are.
Will investing make you rich?
Yes, it could, If you invest in assets that have a potential to grow at a higher rate than inflation. The amount you invest also makes an impact on how much wealth you are going to create. For instance, you purchased a plot of land at a place you believe is going to develop in the future and if it develops then the price of that plot of land is going to increase significantly. The point is, investing with the right research could make you rich.
What are the types of investments?
- Stock: A stock is a type of security called shares. One can invest on the shares of a publicly traded company via a recognized stock exchange. Buying a share of a publicly traded company means buying shares in the ownership of that company. You become one of the owners of the company. People buy shares of a company believing that the company might perform well in future. If a company performs well then people tend to buy its shares more which creates a demand in the market leading to an increase in the price of those shares. The basic intent is to earn capital gain by buying at low and selling at high.
- Bond: A security that pays periodic interest and is backed by the government or a corporation. A bond is a security under which the issuer raises funds from people who buy the bond. Basically, the issuer of the bond is a debtor, and the holder of the bond is a lender. Bond holders lend money to the issuer of bonds by purchasing the bonds. In return, the bond holder is guaranteed to receive periodical interest payments from the issuer of the bonds.
- Mutual fund: An investment company professionally manages that pools money from many investors and invests it in a variety of securities. The holdings of the company are known as portfolio. Mutual fund issues units to the people from whom they pool money. As the value of portfolio increases so does the value of units. There are many different types of mutual funds. Some are equity oriented and invest in the equity shares of publicly traded companies. Some are debt based that invest on bonds of companies or govt. Some are a mixture of both. There are various categories of mutual funds too.
- Index: A type of asset that tracks a specific index, such as the S&P 500 or the Nasdaq Composite or Nifty 50 etc. Index is a group of stocks of different companies. It is a representative of the market.
- ETF: An exchange-traded fund, which is a type of mutual fund that trades on the stock market. It’s a suitable alternative to Index mutual funds as sometimes mutual funds require a minimum lump sum investment amount to start investing in them. On other hand, ETFs don’t have any such requirement. Further, you don’t need to create any account with any mutual fund company. Instead, you can use your demat account which you use for purchasing stocks, to purchase ETFs in the market.
- Real Estate: For beginners with very little capital, it can be difficult to invest in Real estate. But real estate is one of the safest investment options. Returns are guaranteed. Let's face it, land is limited. The demand for it is always going to increase with time. There is a way to invest in real estate by investing in Real Estate Investment Trusts. They pool money from investors and invest in real estate and in return provide periodical incomes.
- Commodities: Investing in commodities is one of the common areas what people think of when it comes to investments. Commodities like gold and silver are the most common choices of people out there.
How to start investing as a beginner or a student?
Investing is a great way to grow your money while also providing you with opportunities to make more money in the future. Here are some tips on how to start investing:
- Start with an index fund: Index funds are a great way to enter into investing for beginners. It tracks the index which is why it’s stable. The cost of these funds are comparatively lower than other funds who invest in stocks on the basis of research done by their teams.
- Pay attention to your risk tolerance: Before investing, assess your risk tolerance capabilities. This helps you to decide which assets to invest in.
- Don’t be afraid: Many people fail to start investing because of fear of losing money. Every investment has some kind of risk involved. Even joining a job has the risk of whether the company you joined will kick you out or not. At some point you have to take a decision. Taking more informed decisions is a way to reduce the risk. Properly researching or consulting a registered consultant can help you reduce the risk involved in investing. Always do proper research before investing your hard-earned money!
Conclusion
Investing is a skill which a person learns over a period. Learn the basics of how to research for investing. Don’t be afraid, just start. It’s a long road during which you will learn a lot of things and gain a lot of knowledge. After a few years you will realize that the decision to start investing was one of the best things you did. Take charge of your wealth and start learning the realm of investing.
Do let me know in the comment section below if you have any questions. I will gladly try to answer your question to the best of my knowledge.
The post doesn't in any way suggest or give any advice on investing. This post is solely for educational purposes only to educate people. Before investing, please do your own research or consult with a professional.
