ABCs of Investing

ABCs of Investing

When you are young, the word “investing” or “investment” seems intimidating. You may say to yourself, “It’s what grownups should break their heads on!”. However, the truth is that if you are old enough to earn money, you are old enough to invest. Investing is nothing but making your money work for you.

Sounds interesting? Well, let us start with understanding the basics of investing.

Definition

Investing is the act of putting money in an endeavor to increase the value of that money, i.e. over a period of time you have more money than what you put in (invested) originally. In other words, investing means putting your money to earn more money.

So, what are the ways of putting your money to work for you?

Investing in assets that increase in value

For example, you buy something like gold or property that increases in value over time. After some years, when you need the money, you sell the asset at a much higher price since its value has increased

 Investing money for someone else’s use.

There are two ways of doing this:

1. You put your money aside for someone’s use and get paid for it. Therefore, when you need your money, you get it back with “interest”.

2. You buy shares of a public limited company and become its shareholder. The company pays you a portion of its profits called “dividend” on a regular basis. This way your invested money generates an “income”.

What investing is NOT

Saving is NOT investing 

Unlike saving, when you invest your money, you do not just keep or preserve it, but try to make it grow. Putting money in a bank account is not investing.

Investing is NOT betting

An investment carries some risk or the other. However, investing is not betting – you do not simply put your money in any random investment vehicle or avenue. True investing is a thought-through process that does not rely on luck or good fortune to gain returns.

Why should you invest?

If you keep your money in a piggy bank or safety vault instead of investing it, it will never grow. To make that happen, you must invest your money to multiply it by earning interest or dividend on what you invest or by buying and selling assets that increase in value over time.

Nobody wants to work forever. This is one of the most compelling reasons to start investing to make your money work for you and secure your future. Whether your goal is to send your children abroad for higher education or retire on the beach, smart investing can help you realize your financial goals.

Consider an example :

Alam and Ajay are two friends who begin working at the same time when they are 22 years old.

Alam is a diligent investor and regularly puts away 20% of his salary in a variety of instruments including mutual funds, shares and fixed deposits. As a result, the value of his portfolio increases and within five years, he is ready to make the down payment for his first home.

Ajay, on the other hand, puts away only 10% of his salary in a recurring deposit and does not consider any other investment. The rest of his salary goes in meeting his expenses and footing credit card bills.

Five years down the line, he is far from making any significant investment because he did not plan his financial future or investments.

Thus, if you plan your investments and invest diligently over a period of time, you can meet your financial goals.