It is something that many people talk about and practice all around the world. Many people have made their fortunes through investing, and it can be a great way to support yourself financially. Some use investment to supplement their income in a relatively steady and predictable way, while others closely follow the market and try to cash in on booms and busts that it experiences. Whatever the case may be, it is recommended that all people have some type of their income going into investments, as a type of security for their retirement. If this is not the case for you, fear not! This article covers the basics of investing, as well as some of the most common ways you can invest and methods you can use for doing so.
What is Investing?
In very simple terms, if you have put some of your money into something, you have invested in it, if the intention is for you to receive some type of profit from it. There are different groups of things you can invest your money into, and in this context, such a thing is known as an asset, which is the term we use in this article. There are four primary classes of assets. These are:
Primary Classes of Assets
In fairly broad terms, when you buy a share or a stock, you are investing into a company by buying a tiny part of it. There are also different subtypes of shares, and the type that you buy determines how much of an influence you have on the running of the company, if at all. For example, if you buy a common stock in a company, then you should be able to give your input in key decisions, like a change in leadership, for example. The level of influence you have also depends on how many stocks you own in the company.
Investing in property is also a fairly common practice, but it is not very easy to do this passively unless you are already fairly independently wealthy. Otherwise, it is often needed for you to get fairly involved in the process, though it depends on what kind of investing you are doing and what type of building it is. For example, many people purchase and renovate property before selling it on again. This can be fairly profitable, but it is not necessarily the easiest thing to do, as it requires a fair amount of time. It can also be quite a gamble, as there is no guarantee that your venture can be profitable, especially if you experiment with finding properties that are in poor quality in an area that you expect becomes trendier or more desirable later and try to fix them up with the intention of selling them on.
Money can be an investment in and of itself, if you put it into an account and let it accrue interest over time. This is not necessarily as profitable as other forms of investing, but it can be fairly dependable and stable if you simply leave the money in the account and don’t touch it.
Bonds/Fixed Interest Securities
Governments and companies often need to borrow money in order to support the economy of their nation. You can essentially lend money to a government or company through a bond. In exchange for this, you receive interest payments from the party that you have loaned your money to.
Other Asset Classes
These are not the only ways to invest, however. There are many other classes of assets, which may actually be more suited to you, depending on what you want to achieve and your knowledge of or expertise in any particular field. For example, if you have a particular knowledge of a certain type of collectible, then you may want to use that as a tool for your investing, and then purchase such items and subsequently sell them on at a profit. Some of the less common, but still profitable, asset classes are:
Artifacts and Collectibles
These can be a great way to diversify your investment portfolio. As mentioned above, if you have a good understanding of the level of interest in specific types of artifacts or collectibles, then this can be a very profitable type of investing. It is important to have some type of expert validation if you want to go into this type of investment, as it is not uncommon at all that people sell fake artifacts and claim that they are valuable.
Investing in commodities can be done either by purchasing shares in them or actually buying the commodities themselves and then selling them for a profit in some way. This is usually goods like coffee or oil, and it is generally most suited to those with substantial disposable income, as it is a fairly expensive and risky type of investment.
What are Returns and How Can They be Earned?
In short, a return is what you earn from your investment, and depending on how you invest, you can receive them in different ways. For example, if you have invested in and own properties, then you can receive rent from tenants, and this is a type of return. Generally speaking, the most common type of return on investments is from shares, and it is earned in the form of profit from selling the shares at a higher price than you purchased them for.
What are Some of the Risks Associated with Investing?
You can mitigate much of the risk associated with investing by being careful with your choices and keeping track of the market, but it is not entirely risk-free to invest in general. How much risk you are actually taking and how predictable your returns are depend on the type of investing you do and what you choose to invest your money into. One of the risks associated with stock market investment, for example, is that the prices do not follow the trajectory you expect and that the selling price might not be as favorable as you expect when you actually intend to sell them. As such, it is wiser not to invest too much into shares until you are experienced in stock market investing.
When you begin investing, it is usually recommended that you choose a variety of different forms of assets or at least choose stocks that belong to companies in different sectors or industries. This is what people mean by having a diverse portfolio, and it is wise to do so in order to insure yourself in case a particular industry or economy that you have invested in suffers in some way.
There are many ways you can diversify your portfolio in terms of investing. Generally, the more diverse your portfolio is, the more security it can offer you, but it is not necessarily wise to invest too broadly if you are not entirely familiar with the different assets you are investing in. As such, it is best to have a good understanding of what you are going to invest in and consult with a financial advisor to find out what some good options are for you to put your money into. Alternative assets are a great option for diversifying your portfolio as well, as long as the assets that you choose are not too niche. However, that is not always a bad thing in and of itself, as long as there is still sufficient demand for the asset that you are going to invest in.
Gold is another popular choice for those looking to diversify their portfolio. There is not a consensus on investing in gold, as many believe that it is a dependable type of insurance that is always be intrinsically valuable, while others feel that it is an outdated investment that can be wasteful compared to investing in a more modern asset. However, it is hard to argue against gold being valuable at the present, and many financial advisors or publications tend to recommend that you devote between 5-15% of your portfolio to investing in gold in various forms. Many invest in gold by purchasing it in the form of bars or bullions, as this can be sold or traded in the case of economic downturn or catastrophe.
When is a Good Time to Start Investing?
Whether or not you are ready to invest depends on you and your financial situation. It is generally recommended to begin investing as soon as you have enough disposable income to do so, but this also can vary with regards to your financial goals. Before you start investing, you should think about fleshing out your financial goals or aspirations in some way so that you have an idea of what exactly it is you are working towards, and then you can think about how investing is going to help you to achieve that.
For example, if you are still in college, then it may be best for you to wait until you have graduated and maybe even pay off any student loans you might have before you start to invest. Conversely, if you feel you have enough disposable income already or would like to begin experimenting with investing here and there, then there is not necessarily any reason that you can’t start now. The most important thing is that you ensure you are entirely prepared to lose the money you invest, especially to begin with. There is always a risk that you won’t see any returns on your investments, and this is especially true when you are not experienced in investing and may make some poor decisions.
While the risk and reward of investing varies from person to person, it is generally advised that you have at least six months’ worth of money saved up before you start dedicating parts of your income to other endeavors. This means that you have enough money to live off of entirely for six months in case you experience some type of illness or other situation that prevents you from working, or if you lose your job, for example. It is certainly not wise to take risks with your money if you don’t have any financial security in case your investments or other ventures are unsuccessful or backfire.