A Guide to Investing for Beginners
You can start investing any time. However, a lot of people still believe investing is only for the rich. It is now easy for anyone to invest. This is because of the introduction of mobile investing apps and new technologies. Investing is now accessible to most people. Read here for a guide to investing.
People use investing to save money and accumulate wealth. It is, however, crucial to understand the ins and outs of investing before you invest your hard-earned money. If you are new to investing, read on to understand how to invest, what to expect in your investment, and what to invest in.
What is Investing?
It is the putting of money into a commercial venture, shares, financial schemes, and other assets with the expectation of earning a profit. It means using your money to create a future benefit.
“Investment” usually refers to the mechanism for generating future income. However, we will use “investment” to mean financial investments. We will refer to “investment” as:
Cash Investments – They are the cash in savings accounts or term deposits. The investor deposits cash into saving accounts to earn interest.
Shares – The investor buys a part of a company or business with the expectation of the business making money and growing in value. Shares are mostly traded electronically on the stock market in most countries. It is easy for investors to buy shares.
Bonds – This is where the investor loans their money to an organization, such as a corporation, a government body, or the Government. The organization uses the money from the investor for a specific project. Then, the organization pays the investor interest on their loan. The interest is paid throughout the term or in full amount when the corporation repays the loan.
Investment Property – The investor purchases a real estate property to make money. The investor can make money through reselling the property or renting out the property. The investor does not live in the property. Escrow payment services are often used to mitigate risk in the transaction.
Alternative Investments – They are the investments outside property markets, bond, cash, and share. Organizations and high-net-worth people use alternative investments, including private equity and hedge funds. Collectibles, such as art, or commodities like gold are some of the examples of alternative investments.
Why Invest? And What Can You Achieve?
Investment can make you money in two ways – income and capital growth. If you know your investment goals, it can help you balance these two ways to achieve your investment goals. You can use your investment goals to create your investment strategy. It is better to talk to a professional to help you create your investment strategy.
Capital Growth – The investor buys an investment with the expectation of earning a profit by selling the investment in the future. For instance, an investor buys a property for $500,000 and sells the property for $550,000 in the future. Then, the capital gain is $50,000. If the investor buys shares for $1,000 and sells the shares at $1,500. Then, the capital gain is $500.
Investors can earn a regular income from their investments. For instance, if the investors buy a rental property, they can earn money from rent. In addition, investors can earn dividends from their shares.
What Are The Different Types of Investments?
There are so many different types of investments nowadays. The best investment option for you will depend on your risk tolerance and what you want to achieve.
Here are the most common types of investments:
Managed Funds
It is a large pool of cash from several investors. A “manager” of the funds invests the money on behalf of the investors. The manager, therefore, uses the money to purchase commodities, property, bonds, or shares. The manager expects these investments to make more money in the future.
Managed Funds are ideal for new investors. This is because professionals with expertise, knowledge, and skills in investing manage the money on behalf of the investors. Managed Funds do not, however, guarantee returns and they charge investors fees.
There are so many Managed Funds to select from. It is, therefore, best to do your due diligence before choosing them. It is better to consider the risk profiles, returns, fees, and conditions before making your decision.
Shares
It is not easy to understand the stock market. It is, therefore, better to do proper research before you invest in shares. If you buy shares, you are just buying a percentage of the company. The expected future performance and past performance of the company influence the prices of their shares.
The returns from shares can be “capital gains” if the investor sells their shares at a profit. Or the investor can earn regular dividends or income the profits of the company.
Investing in shares is a medium-to-high risk investment since share prices are sometimes volatile and the company cannot guarantee dividends. However, shares have been outperforming cash investments for the past several years.
Exchange Traded Funds (ETFs)
They are investments in the collection of securities, which track the underlying asset class or stock market index. They are commonly called index funds. Investors can buy index funds in things, such as commodities like gold or ASX200 in Australia.
The objective of Exchange Traded Funds is to track the market. It does not try to beat the market. Investors can, therefore, generate a moderate return in the long term. The work of the fund manager is to select what to track. EFTs are, therefore, perfect for new investors, especially the ones with low-risk tolerance.
Fixed Interest
They are an investment in things, like bonds and term deposits. The investor, essentially, loans their money to the corporation, government, or bank for a specific time. The lender, then, earns a fixed amount of interest during this time. The organization pays the interest regularly throughout the term or at the end of the term when the organization repays the money.
Fixed interest is a low-risk investment. It does not, however, generate the same returns as risky investments.
Cryptocurrency
Cryptocurrencies are new investment opportunities for investors. They are, however, not proven in terms of returns and risks over the long term. They are high-risk investments and highly volatile since they are unregulated and decentralized. It is, therefore, crucial to do your due diligence if you want to invest in cryptocurrencies. Do not risk your hard-earned money without doing proper research.
How Do I Know What to Invest In?
There are so many things you need to consider before you invest your money. It is essential to know what you are trying to achieve. Are you looking for a secure investment to put your cash? Do you want to grow your money over time? Do you want to invest in high-risk investment opportunities? If you are young, you can invest in high-risk investments since you may not need the money right now.
If you are retiring soon or supporting your family, you may want to look for low-risk investment opportunities. Use low-risk investments to secure your money. Your money will grow over time if you pick the right investment.
The different investments come with different returns and risks. So, you have to know the risk you are willing to accept before choosing an investment.
It is better to do proper research and know your financial goals before you make an investment.
What are the Risks of Investing? What is My Risk Profile?
Investing comes with several risks. It is possible to lose all of your money. Your investment may not perform as you expected. So, you can lose some of your money.
Here are the financial risks of investing:
Equity Risk – The value of the investment can decrease in the long term. For instance, the share price can drop or the investment property’s value can go down.
Interest Rate Risk – The interest rates of the investment can change, changing the value of the investment.
Currency Risk – If the investor invests in overseas investments, the changes in exchange rates can decrease the value of the investment. For example the conflict in Russia Ukraine market impact could affect investments.
Liquidity Risk – The investor can fail to sell their investment when they need or want to. It is much easier for investors to sell their liquid assets. A traded stock is liquid. However, a property is not liquid, especially during difficult economic times.
Concentration Risk – It is risky to invest all your cash in one type of investment or one asset. For instance, it is risky to invest in one commodity, a specific type of stock or stock, or a house.
Inflation Risk – It is commonly called purchasing power risk. Inflation determines the returns and value of an investment over time.
These are the main financial risks. It is, therefore, better to do your research before investing your money. If you are not careful with your money, you can lose them. It is better to know the financial risks that come with the investment you want to invest in.
Diversify Your Investment to Reduce Your Risks
Diversifying your investment can help you reduce your risk. You may have already heard people say; “Do not put all your eggs in one basket”. It is best to invest in different types of assets. If your portfolio is diversified, it can reduce your risk of diminishing returns or losses. If one of your assets does not perform, the other assets may perform.
What Role Does Superannuation Play in My Investment Portfolio?
Superannuation is also called super. It is the perfect tax-effective retirement savings for most employees. It plays a major role in the investment portfolios of most people. Employers in Australia are required to put aside a specific percentage of their employee’s salaries into their superannuation account. This is called Superannuation Guarantee. The superannuation company invests the money on behalf of the employees.
The employees can add more money to their superannuation account. The government encourages employees to invest in their superannuation accounts. That is why they offer tax concessions if the employee puts money into their superannuation account.
The money is, however, for retirement. It is, therefore, impossible to access the money until you meet certain conditions, such as when you reach a certain age and/or when you retire from the workforce.
A lot of people overlook super as an investment opportunity. It is just like any other investment. Therefore, you will have to make decisions on how you invest in your super. You will have to select your super provider and choose the different investment options of the super provider.
It is better to select your super investment, which aligns with your return profile and risk. Do not forget to compare the fees of multiple super providers since the fees can have a major impact on your savings in the long term.
