Investing always feels like one of those things that rich people do to make money without having to do anything. There’s a vague feeling of high stakes risk and rewards surrounding it and, to be frank, it feels so totally mystifying that many of us just close it down as an avenue of opportunity because it seems impossible to navigate. It doesn’t have to be this way though! We’ve answered a few of the initial questions you may have when you’re beginning to think about investing money for yourself.
1. What is investing?
As much as I hate to coin one of the smuggest and most irritating phrases of recent times, investing really is all about “working smarter, not harder”. It’s about laying out money today in order to receive a bigger payback in the future. You choose a commodity that should increase in value over time, so that in the future it will pay you back more that you put in.
There’s a whole ream of different ways to invest your money. You can invest in stocks, bonds, companies, real estate, of mutual funds, to name just a few.
2. Ok, now explain those things
Stocks: A stock is a share issued by a corporation. It doesn’t actually mean you own part of the company, but instead you own a ‘share’ of the company. It means you can receive a percentage of the dividends (which are the company’s profits), an amount that obviously depends on how many shares you own, and it also gives you the right to sell your shares on to someone else if you so choose.
Ie. You buy a stock for £1 and in 6 months it goes up to £1.10; you’ve made 10p for doing nothing. You can either hold on to that share if you think the value will continue to increase, or if you want to, you can sell it on to someone else at the new higher value.
Bonds: There are a few different types of bonds, but in essence they are basically ‘loans’. Instead of, as with stocks, buying a share of a company, you are instead agreeing to loan them money. This money keeps their fires stoked and means they can make money and continue doing their thing, and in return for your loan the company will pay you back with a little interest. Just like when you take out a bank loan.
Because of the nature of what they are they’re more stable than stocks, which is good in one way, but it also means you don’t really get the ‘high risk high reward’ opportunities you do with stocks.
Companies and real estate: These two are pretty self-explanatory. You can choose to invest in a company you believe will do well, and you will see your investment increase if all goes to plan and the company does grow. However, (as will all investment), you must also be prepared for the eventuality that the company may bottom out and all your money could be lost in a moment. There are loads of different advice columns out there that go into the ‘how-tos’ of investing in companies if you want to look into it in more details.
The same goes for real estate, many people will put money into either buying rental properties, or holiday time shares, as for many years real estate has been an asset that has either increased, or at the every least, held it value. Once again though: not a sure fire gamble.
Mutual funds: Instead of just one share in one company, a mutual fund is in essence, an opportunity for you to invest in many different companies. You invest in the mutual fund, and in turn, the managers of the fund then invest your money on your behalf in a range of different shares.
3. Is investing risky?
Simple answer is; it can be. It depends what you invest in.
The best way to manage your risk is to diversify your investments. Basically, spread your bets. By putting less money into each venture you gain less but also manage the risk of losing less.
Most importantly, investing is risky if you are not fully financially educated. Don’t invest in something you don’t fully understand. Get yourself read up about the T&C’s of the investment you’re considering. If it’s a company then look into it history, it’s management, and read its forecasts. Make sure you know exactly what you’re doing with your money before you invest it.
4. What’s the lowest risk investment option?
Remember that low risk usually means lower reward. Not that this is inherently a bad thing, because investing in safer options means your money is safer, it just usually means you many need to pay out more to see more of a return. You money may also be tied up for much longer periods of time in order to make returns. For example, some fixed annuities require a ‘surrender period’ (where you can’t access your cash) for up to 12 years. So when you put that money away, you need to forget about it for a long time.
5. How do I know if I should invest?
Of course that’s up to you, but there a few key things you should consider first.
Are you read up on investing?
Don’t even think about starting to invest until you really understand the options you are considering, be they stocks, shares, mutual funds, or anything else. Getting involved financially in something you don’t fully understand could cause you real chaos and financial trouble.
Are you financially stable?
Are you able to keep yourself financially steady on a continuous basis? (ie. you don’t drag yourself over the finish line at the end of the each month) Are you completely debt free? Do you have savings in the bank? And, most importantly, are you able to absorb the loss of your investment if it should happen, without throwing yourself into financial ruin or heavy debt?
If the answer to all of these is yes, then that’s great! You seem to be in a financially stable position.
Do you have an end goal?
Do you know exactly what you want for invest he money for? Ie. If it’s for retirement then you will want a safe, more long-term growth option. If you want it for short-term investments or potential high reward schemes, then you will need access to it all the time. Knowing what you want from your investment will help you choose the right investment option for you.
To wrap up, as we said, this is really just a basic overview; there is a world of information and jargon that we haven’t even ventured into. This is a foundation to start the cogs turning and to begin the demystification process. However, there’s no substitute for a solid knowledge base, especially when you’re talking about money. If you want to read up more on investments there are plenty of great websites out there, however, we’d also really recommend getting your hands on “The little book of common sense investing”. It’s easy enough to read and it provides some great advice for the first time investor.