How Investing Works

You often come across the knowledge that investing is one of the fastest ways to grow your money potentially. However, if I ask you what is investing, most of you will not have a clear idea. So I assume knowledge of how investing works and how can you get started is also scarce.

What is investing?

In the most straightforward language, investing is when you buy an asset at a low price and sell at a higher price to earn the price difference.

Investing involves purchasing assets with a high probability of earning interest income or return in the future.

These assets include the share of stocks of a company, a commodity like gold or silver, and much more.

These assets are categorized under five asset classes, namely:

1. Company Stock/Shares

2. Bonds

3. Commodities

4. Real Estate

5. Mutual Funds/ETFs

The question now is, how are saving and investing different?

The first and most evident difference is that investing leads to ownership of a product in either of the five investment classes.

In contrast, savings store your money somewhere safe and do not lead to new asset ownership.

Second, the opportunity for growth in savings is lower and might even not exist at all, whereas investing helps you beat inflation through the interest earned. However, investing comes with a risk and return proposition which we will explore later.

Third, the objective of savings is for short-term goals, and it can be done without much research, whereas investing is suited for long-term goals like building wealth or funding education. One of the different objectives is that savings are usually higher liquidity instruments than investing.

But I trade stocks on the exchange, so investing and trading are the same?

No, when you invest, you hold the asset long-term, even stocks, but trading involves short-term strategies to maximize daily weekly or monthly returns. Trading involves more frequent transactions like buying and selling stocks, commodities, or other instruments.

Now that you know what is investing, how do you plan to start it? Let’s get straight to it.

How to begin investing?

To start investing, you need to be clear on a few decision pointers, the amount of money you are willing to invest, the quantum of risk and return you expect, and your involvement. Going ahead from here, have an investment strategy in place. The three golden rules guiding your strategy are:

1. Start investing early. The longer the money is invested, the more opportunity it will create for growth. Remember growing old should not hold you back from investing. Whenever you start, you will have growth potential.

2. Stay invested for as long as possible. Interest earned over interest or profit earned over profit sounds like an exciting proposition, right? Well, the longer you invest, the higher the compounding returns. It means more money.

3. Diversify your investment. Until you don’t have a clear idea of the risk and return proposition, invest across assets with low to high returns. Low return assets carry a low risk and vice versa. Therefore, you can secure your money over a more extended period by diversifying.

4. Revisit your investment strategy every quarter. As the economic conditions or policies of the country change, different assets will not react in unison. You need to identify which asset class will have a higher probability of gains or losses and enter or exit accordingly.

Ready to invest?

Not yet. Even with a sound investment strategy, you might fail. Why? Because you might begin with the wrong investment account. Start the account selection by understanding each asset class and its products in-depth and matching it with the amount you are ready to invest. Then, select the top three products, each from a different asset class. Allocate an amount to each of these and now, start investing.

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