Investing money is a concept that is easy to understand and implement. All you need is money and a computer with a reliable internet connection. With a bit of extra money, you can get into investing in no time. However, it is important to understand the ins and out of investing, particularly when it comes to risks. In this article, Ollie Beckett will look at some of the most important elements a person getting into investing should know about.
What is Investing?
Investing is the act of putting money into a financial asset, such as a stock, bond, or mutual fund, with the expectation of earning a return on that investment. The goal of investing is to grow wealth over time by buying assets that are expected to increase in value or generate income.
What are the Different Types of Investments?
There are many different options for investing your money, including land, properties, gold, vintage cars, paintings, and wine. Some of the most common types of investments include:
Bonds: When governments or companies need to raise money, they may issue bonds, which are essentially loans backed by interest. Investors can buy bonds and earn a return on their investment through interest payments.
Shares: Shares represent units of ownership in a company. When you buy shares in a company, you are essentially buying a small piece of that company.
Funds: Funds allow investors to pool their money and invest in a diverse range of holdings, such as bonds and shares. By investing in a fund, you can gain exposure to a variety of assets without having to purchase them individually.
How Do Investors Make Money?
There are several ways that investors can earn money through their investments, including appreciation, dividends, and interest payments.
Appreciation: The value of an investment can fluctuate over time, and investors often hope to sell their investments for a profit in the future. If the value of an investment increases, the investor may realize a capital gain.
Dividends: Some companies distribute a portion of their profits to shareholders in the form of dividends. These payments are usually made twice a year. If you own shares in a company, you may be eligible to receive dividends.
Interest Payments: Investors can also earn money by lending money to businesses or governments and receiving regular interest payments. One way to do this is by buying bonds, which are essentially loans that are backed by the issuer. When you buy a bond, you will receive interest payments until the bond matures and you receive your initial investment back.
What are the Pros and Cons of Investing?
Grow Your Money Faster
Investing your money can help it grow faster than if you simply save it in a traditional savings account. This is because inflation can erode the value of your savings over time while investing has the potential to generate higher returns. For example, if you invest $5,000 over a decade and your investment generates an average return of 5% per annum, you will have $8,144.47 after this period. However, if you save $5,000 in a savings account with an annual interest rate of 1%, you will have only $5,525.62 after the same amount of time.
Inflation can also further decrease the value of your savings. According to the Bank of England, the cost of goods and services increased by 3.1% per year from 2009 to 2019. This means that in 2019, you would need £6,757.41 to have the same purchasing power as £5,000 10 years earlier. While saving your money can help you keep what you have, investing has the potential to increase your wealth over time, even after taking inflation into account.
Investing Comes With a Risk
Investing carries some level of risk, as you may not be able to recover your original investment if the value of your investment decreases. It is important to carefully consider your investment strategy and the types of investments you choose in order to minimize your risk. Diversifying your investment and taking a long-term approach can also help reduce your risk and increase your chances of earning higher returns.
However, it’s important to note that investing does not come with the same guarantees as traditional savings accounts. For example, if your bank or building society goes bankrupt, you may be able to recover up to £85,000 of your money through the Financial Services Compensation Scheme (FSCS).
When it comes to investing, it’s important to do your own research, rather than relying on the advice of inexperienced individuals or chasing high returns. Patience is also key to making money in the long term.
How Do You Start Investing?
If you have been doing your homework, chances are you have come across ‘’crypto millionaires’’ or adverts and marketing strategies that attempt to lure you into a ‘’get rich quick’’ scheme. Well, these investment scams are not uncommon, and so, it’s important to be cautious when considering investing your money. If an investment opportunity promises unreasonably high returns, it’s likely a scam and not worth your money. Property is considered to be one of the safest form of investment, make it possible with a first charge bridging loan.
Instead of rushing into any investment, take the time to do your own research and consider consulting with a financial advisor. They can help you choose the best investment based on your goals and the amount of money you are willing to risk. It’s also important to be realistic about the potential returns you can expect. Higher returns often come with higher risk, so it’s important to find a balance that works for you. If you prefer to handle your own investments, you can use a tax-free online platform like a stock and shares ISA to buy and manage your investments.
How Can the Novice Start Investing?
Investing can be a good way to grow your wealth over time, but it’s important to be cautious and do your research before making any decisions. If you’re a beginner, it may be wise to start by investing in bonds or a few individual companies. Another option is to invest in a fund, which can be a simple and cost-effective way for beginners to diversify their investments and reduce their risk.
However, it’s important to keep in mind that investing carries some level of risk, and you could potentially lose money. To help minimize this risk, it’s important to carefully choose your investments and be patient in the long term.
With these tips, any beginner in investing should have the knowledge required to ensure they are making an informed decision.