Synopsis
Investing Basics
The idea of investing, although highly popular, isn’t executed as much by everyone. You’d have definitely heard that investing is the key to building wealth and securing a prosperous financial future. But how to approach investing as someone who knows only a thing or two about finance? You see, while the world of finance may seem daunting at first, grasping just the fundamental concepts can very much enable you to navigate the complexities of the market successfully. So, what you really need to begin your personal finance journey is a quick overview of the basics of investing. Crafted along the same lines, we will help you explore the primary asset classes like stocks, bonds, real estate, and others, while also throwing light on which to turn to based on your personal goals.
The first thing you should know, is that you don’t understand what investing actually means. No really, while the idea of investing seems so simple, the ideology behind it isn’t. At its core, investing means putting money into various assets or ventures with an expectation of generating returns. This, you know. However, what you might not know, is that the intricacies lie in understanding the different asset classes, risk management, market dynamics, and the psychology that influences decision-making. Having money and buying a stock is simple. Anyone can do that. But seeing that same amount reduce by even 2% and having the mental stability to not be affected is rarely found. But you don’t have to worry about this, as being unnerved by market volatility is easier if you know what you’re getting into. Let’s now break down the world of investing into widely known asset classes.
First,
STOCKS
Probably the most common and lucrative asset class known to beginners. Owning these makes you an owner in the company. That’s right. Let’s say you purchase one, just one share of Tesla. That would give you the right to call yourself the owner of tesla. Obviously, to a very miniscule level, but you get the idea. Building on the same thought, if let’s say there are 100 thousand shares of Tesla in the market, and you buy 10 thousand shares, you become a 10% owner of Tesla. This 10% ownership means that you have a right over 10% of Tesla’s profits and assets, as well as liabilities and losses. So yeah, a double-edged sword, but highly rewarding.
Now, a question for you. Guess which stock has given the maximum return in the history of all stocks?
The answer is Monster. Any guess on the return numbers? Starting from the day it began trading, if you had invested $1 in the stock of Monster, you’d have roughly $900 in total investment value. That’s about 90000% of return on investment.
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BONDS
Our second investment asset class is Bonds. You’ll find them on the opposite side of the risk meter, as they’re generally considered as safe investments. Essentially, Bonds are debt instruments issued by governments or corporations to raise capital. When you purchase a bond, you are effectively lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. It’s like you playing the role of a bank. But why would you do that? To safeguard your capital! If you analyse yourself and find that you just can’t handle risking your money, simply turn towards bonds and enjoy a stable income in the form of interest, all the while your capital remains safe. You see, while bonds are relatively safer than stocks, they are not actually risk-free, unless it is government bonds that we’re talking about. Bonds issued by companies, for example, are only as safe as the existence of the company. If the company gets wiped out, so does your money. And even within bonds, there are risk-free bonds, investment grade bonds, and junk bonds, each representing increasing levels of risk.
Interesting Fact
The first government bond recorded in history was issued in China during the Western Han Dynasty, and they were issued to finance the construction of the Great Wall of China.
This tells us how long back does the history of this asset class goes.
we discuss the next and perhaps the most exciting asset class.
REAL ESTATE
The asset class that made our great grandparents today’s millionaires. In very simple terms, Real estate investing involves buying and owning property with the expectation of generating rental income or selling it at a profit in the future, or both. Property here can include land, apartments, office space, showrooms, and other variations. Now, because Real estate can offer both income and appreciation potential, it a popular choice among investors seeking stable returns. Additionally, real estate often serves as a hedge against inflation, as property values tend to rise over time. Everyone knows this, but have you ever wondered why? The answer is simple economics, that is supply and demand. You see, there is only limited amount of land, but the people living on it keep on increasing. So, as more and more people try to acquire the limited area of Earth, the value of land only increases. As people get richer, they compete with others who have also gotten rich, and both these parties try to pay their highest to acquire land, leading to inflation-equivalent price appreciation. Simple. Now, as you would have observed, quite a lot is good about this asset class, but all of it comes at a cost. No, quite literally, the cost of real estate is the biggest challenge when it comes to investing in it. It is in fact so high that in today’s time, a person not owning any real estate cannot think of owning it without the help of debt.
COMMODITIES
They are physical goods or raw materials used in the production of goods and services. Some very common ones include gold and other precious metals, crude oil and natural gas, and agricultural products like wheat, corn, and coffee. These are primarily the best hedge against inflation, because naturally, inflation is derived by the increase in their prices! Maybe this is why investors prefer buying gold bars as a hedge against inflation and currency fluctuations, preserving wealth in times of economic uncertainty.
MUTUAL FUNDS & ETF
These are investment vehicles that pool money from multiple investors to invest in a diversified portfolio of assets. They can focus on various asset classes, sectors, or investment strategies. Like for example, an investor purchases shares of an S&P 500 index ETF, which tracks the performance of the 500 largest publicly traded companies in the United States. As the broader market gains returns, so will the investment in the index fund.
Final Thoughts…
Now, you have all the puzzle pieces right into your hands. We know that stocks give out crazy returns but are equally risky. So what you can do is invest in stocks for long term goals and let time smoothen out the risk of volatility. Bonds, on the other hand, can be used when you want to protect your capital and have certain cash flow flowing in at regular intervals. But the choice of bond and make or break your portfolio. Then we have real estate, an expensive but equally rewarding investment. Start out with equity and debt till you accumulate enough to enter Real Estate, and keep reinvesting the cash flows to amplify your returns, not to mention the benefit of inflation hedge that you would also derive! So you can visualize a basket now, in the form of your portfolio. There’s different fruits, each with their own sweetness. And the more varied the fruits are in this basket, the better are your chances to avoid a stale batch. This explains what diversification is. As you’d know the old saying, “Never put all your eggs in one basket”. It only teaches us to spread our investments in different asset classes so the risk of one asset class failing doesn’t wipe out your capital.
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