In the modern world, investing is a very popular topic, especially since the Internet became widely spread and popular online brokers like brokstock.co.za or Ameritrade have opened their doors to the general public. In this article, we will explain what investing is, explain its risks, and provide several helpful tips on getting started. By the end, you will have a general idea of investing and will be able to decide whether this is something you are interested in.
What is Investing?
In short, investing is the process of buying assets that increase in value over time. The word originally comes from Latin. For the Romans, "investire" stood for to clothe or dress. Investing became known as a term for investing money primarily in the course of the emergence of banks and capital markets during the Industrial Revolution.
Today, the word is most commonly used in connection with investment funds or investing in stocks or other forms of money. The goal here is usually a return on investment. That is, whoever decides to invest expects something in return - investing should be worthwhile.
Risks of Investing
Any investment contains elements of risk. The basic investment theory says that the potential profitability is inversely proportional to the level of risk, and it does not matter at all whether we are talking about passive investing, active stock operations, or a new business project. Risk allows you to earn, and at the same time risk is a potential loss, so when investing it is very important to understand the risk to which you are exposing your capital.
The investment risks can be divided into two subgroups: macro-risk and micro-risk. The macro-risk subgroup includes everything that is commonly analyzed in the fundamental analysis at the macro level.
The investment risk you should know:
- Systemic risk - the risk of default or ill-being of a country's economy as a whole. Affects all instruments - from deposits to futures and currency pairs.
- Regional risk is the risk that a certain region will suffer. Important for holders of municipal bonds, or for shares of a city-forming company.
- Industry risk - affects mainly shares, within a particular industry. The more developed the industry in the country, the less the influence of these risks.
Understanding the risk is often the first step in investing. Besides, there are some practices that can help to minimize the risk and make the investment safer.
Tips for Safe Investing
To start investing you will need to learn a lot but to start as soon as possible, here are a few tips that will help you to ensure your money will be safe.
Understand Your Financial Goals
The first step in investing money is always to look at your assets as a whole. First, consider how long you want to invest your money and how much money you want to have available at the end of that period. Perhaps you want to make a special purchase or you are saving for retirement. For an investment period of up to five years, we speak of a short period, up to ten years of a medium period, and beyond that of a long investment horizon.
Basically, the longer you invest your money, the more you can invest in equity funds since the risk of price losses decreases with longer time periods. For example, from 1975 to the end of 2021, you would have achieved an average return of around 9.5 percent per year with an index fund based on the globally oriented MSCI World share index.
If you deal with capital investments more closely, you will receive advice for allegedly safe investments with much net yield, in which you should invest immediately! However, you don't exactly have the capital on hand to get into such a deal and are tempted to take out a loan. We would advise you against such a course of action.
The problem is that no one can guarantee you profits, and the interest on the loan works against your net return. In the case of long-term capital investments in connection with a loan, the monthly deduction is still added, which you first have to pay from your current income, until the return has developed. So, start small, don’t try to make it big from the very beginning.
Diversify Your Investments
As with so many other things in life, do not back just one horse. The point of this wisdom is to spread investment risk as widely as possible. Individual companies, industries, and regions can always be affected by crises. However, it is rather unlikely that all markets will go down. Therefore, we advise having trading objects from different industries and regions of the world in the portfolio.
The same applies with regard to asset classes. For example, many experts advise investing in precious metals such as gold, in addition to various types of securities. A relatively new way to diversify the portfolio is crypto assets, but there is much to be said of this industry’s risks.
Research Before Investing
Before you invest in an asset, you should understand how it works. This includes both the asset class and the specific product you want to invest money in. You should know what opportunities and risks a stock, ETF, or real-estate entails. Compare these parameters with your goals and investment horizon.
Also, keep yourself regularly informed about political and economic news. Сertain decisions and events can be reflected in the markets with a certain delay. With good information, one can be a step ahead of the market and/or other investors.
Know the Risks
Every type of investment has its own risks. Even thou different markets can influence each other, sometimes the crashing of one market does not mean that every other will follow. So, to correctly manage your portfolio you will need to assess the risk of each individual position and act accordingly.
Other things to keep in mind are the fees and taxes. When calculating risks and possible returns/losses people often overlook these points and as a result encounter unsatisfying results.
Stick To Your Plan
When you want to start investing, you should think about what your long-term goal is and create a plan to achieve it. For example, if you want to provide for retirement, you could invest in private pension funds or an ETF savings plan. If you would rather increase your money in the short term, day trading might be something for you. Whatever your goal is, stick to your plan or the risks might skyrocket.
If you start saving early, you logically have more time to put money aside. But when you invest for the long term, for example in ETF savings plans, you can also benefit from the compound interest effect. This effect can quickly turn your linear return into an exponential curve.
So, we hope that you have found the information in this article useful and it will help you to start investing as soon as possible.