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Some of the important investment terms to understand before you start your investment journey are:
Capital: The money that you invest.
Assets: The instruments (financial tools) you invest in.
Return: The money that you make or loose on you investment.
Profit: The positive return on your investment.
Loss: The negative return on your investment.
One of the most effective ways to write your story is through investing. However, understanding the how, where and for how long to invest is not always easy.
If you want to say âI grew it,â then putting your hard-earned money to work (without you having to do much at all) is simply the best way to go about it. Whether you are preparing for retirement, saving for your childrenâs education or simply want to grow your wealth, itâs crucial to understand how to invest in a way that best suits your needs.
There are numerous investment opportunities available that cater to different goals and risk profiles. In this article, weâll walk you through some of the basics of investment and the options available to you, and give you some hints and tips on how to get started.
What is Investment?
At its core, investment involves putting your money into assets with the hope that it will grow over time. Over time are the operative words. Paul Samuelson, the Nobel Prize-winning economist, said, âinvesting should be more like watching paint dry or watching grass grow. If you want excitement, take your dollars to Las Vegas.â What he means is that growing your money through an investment takes time and a lot of patience, but the end result is usually worth it.
Whether you choose to invest in shares, property or unit trusts, the idea is for your money to do the heavy lifting, generating returns while you, over time, reap the rewards. Once your investment has matured (i.e. reached the end of its predetermined term), you can choose to reinvest the funds youâve earned or you can use them for something else.
Investments can be short term (e.g. you buy and sell shares for gain) or long-term (e.g. youâre building a retirement portfolio). Regardless of your strategy or needs, the aim is to increase your initial investmentâs value.
- Saving money to make more money (profit)
- Buying an item that will be worth more money in a few years
- Purchasing assets that can generate an income or earn you interest over a period of time.
In the abovementioned scenarios, your money is always making more money.
- Funeral cover
- Insuring your car
- Paying into a stokvel
- Putting money in a box under your bed.
In these instances, while you may be making a monthly contribution, your money doesnât grow.
Balancing risk and return
Investing aims for high returns, but different investments carry different risks, and returns vary. Balancing risk with return is key. The biggest risk is losing all your money, while volatility can cause value fluctuations. Prices of assets like stocks depend on supply and demand, leading to ups and downs, or volatility. To manage risk, diversify by spreading investments across asset types, like combining high-growth funds with safer assets.
The Two Investment Categories Available To You
When deciding on the investments you want to make, you should choose the one that suits your investment goals and risk appetite best. You can choose between:
Pays interest at a rate that changes based on a variety of factors, such as the growth of the company being invested in and its economic situation, and the behaviour of the financial markets.
An example of a variable income investment is buying shares in a company.
Pays interest at a rate that is known in advance to the investor like, for example, government bonds.