Disclaimer: The information presented is not intended to be financial advice and readers should seek professional advice before making any investment decisions. The author and publisher are not responsible for any losses or damages that may result from the use of the information presented in the article.
What is investing
Investing is such a big word, and it can be difficult to comprehend what it means. In simple terms, it involves placing money and resources to generate returns and profits in the future. There are many forms of investing and different investors have different strategies. Some investors prefer long-term investing while some prefer to take on more short-term speculative approaches.
It is also important to discern between investments, assets, and liabilities. Some purchases may look like investments but are more of a depreciating asset/liability. For example, if you were to buy a car for your own personal use, it is not going to generate a return or appreciate in value. Hence, it may be classified more as a depreciating asset than an investment. On the other hand, if you purchased a car and leased it out to generate income, it could be considered as an investment since it generates a return for you.
Why is investing important?
Different individuals have different life goals and investing can be a great aid to meet those goals. These goals may be early retirement, purchasing a dream home, being able to afford that luxury holiday or even just protecting yourself against inflation.
The average price for a bag of potato chips in 2000 was $3.36, in 2023, that same bag of chips now costs $6.24. Over time, the value of our money erodes when we do not invest it. It is important to invest in assets that beat inflation rates allowing us to retain the value of our money.
What are the different types of financial instruments?
There is a myriad of financial instruments to choose from such as stocks, bonds, mutual funds, real estate, cryptocurrency, gold, art pieces etc.
Stocks
The term “stocks”, “shares” or “equities” are interchangeable and are used to represent ownership in a publicly traded company. When you buy a stock, you essentially become an owner of the company and as a result, are entitled to a portion of profits. Investors can realise these profits through dividends paid out by companies or through capital gains (increase in stock price).
While investing in stocks may give you higher returns than other financial instruments, it is important to note that higher returns do come with higher risk.
Bonds
Other than issuing stock, another way that companies or governments can raise funds for their operations and projects, is through bonds. Bonds represent debt. Think of it as you are lending your money to a company or a government. In exchange for lending your money, you are promised regular interest payments and a return of the money you invested (principal) when your bond expires.
The length of your investment with bonds varies. There are bonds where your money is invested for a few months and bonds where your money is invested for years. Bonds are usually considered to be less risky than stock and provide lesser returns.
Mutual Funds
Mutual funds are essentially money collected from many investors and invested in a portfolio with several financial instruments. The managers of the fund buy a variety of assets depending on the objective of the fund. Some examples include equity funds, bond funds, balanced funds, international funds, and alternative funds.
When you buy a fund, you become a part owner of the portfolio. When the assets in the portfolio increase in value, so do the value of the mutual fund. Such funds provide a number of benefits such as diversification and professional investor management.
It is important to check certain metrics before purchasing a mutual fund. Some of these factors include historical performance, fees and expenses, information of fund manager, risks of fund.
Sources:
https://www.in2013dollars.com/Snacks/price-inflation
https://moneycompass.com.my/2021/02/19/5-key-charts-for-investing-in-2021/
https://commons.wikimedia.org/wiki/File:Depreciation_car.svg
https://www.tomcopelandblog.com/blog/ive-got-some-money-saved-for-retirement-now-where-do-i-put-it