What is Investing? Investment Meaning, Importance, and How to Invest

Disclaimer: This article is provided for informational and educational purposes only and does not constitute investment advice, a personal recommendation, or an offer or solicitation to buy or sell any financial instruments. The information is generic in nature and does not take into account the investment objectives, financial situation, or knowledge and experience of any individual client, as required under MiFID II. Investments involve risks, including the possible loss of capital. Past performance and historical data are not reliable indicators of future results. Market access, trading hours, and order availability may vary depending on the venue, jurisdiction, and service provider.

As individuals, we earn money, save a portion of it, and keep it securely in a bank account. However, this may not always be sufficient to build long-term wealth, as it loses its value to inflation and rising prices of goods and services. Investing helps you potentially address these challenges, but only a relatively small proportion of people globally invest in any assets.

While saving money is important, it is often not enough to grow your wealth. When you invest, your money is allocated to assets that may generate returns over time, slowly and steadily. In this beginner investing guide, we will understand what is investing and how it works.

Investing Basics: What Is Investing?

Investing refers to the process of putting your idle money in different assets like real estate, stocks, mutual funds, and/or bonds to seek potential returns. When you invest, your money is exposed to market opportunities and risks. It can help you accumulate wealth gradually, particularly when you remain invested over a long period.

Suppose, you deposit $1,00,000 in a savings account with an interest rate of 3% per annum. Meanwhile, prices are increasing at an average rate of 3% per year as a result of inflation. This implies that your money is increasing at a slower rate and your expenses are increasing at a higher rate. Investing may help mitigate the impact of inflation, although this is not guaranteed.

How Investment Works

To understand how investing works, consider it as putting your money to work rather than letting it lie idle. You invest your money by purchasing real estate, buying shares, funding a business, or buying gold. As their value changes over time, it may provide you with additional income known as return.

Purchasing company stock, for instance, allows you to benefit if the business performs well and the share price rises. Another example is when you buy a property. As its price appreciates, you may realise a gain when you sell that asset.

There are, however, different risks associated with different asset classes. Time, perseverance, and a willingness to take risks are necessary for successful investing. Returns are not guaranteed and outcomes depend on market conditions and individual circumstances.

Benefits of Investing as a Beginner

Here are all the ways investing may support long-term financial planning and why one must begin their investment journey early on in their career:

1. Grow Wealth Slowly and Steadily

Your money is not lying around when you make regular investments. With time, it may increase by interest, dividends or by price appreciation. Even a small sum that is invested may contribute to long-term outcomes in the long run. Herein lies the power of compounding of wealth, which can play a role in long-term investing strategies.

2. Helps Achieve Financial Objectives

Besides growing your wealth, investing also may support both your short-term and long-term objectives. For example:

• You can invest a small amount per month in a mutual fund or systematic investment plan (SIP). When it grows in 5-10 years, you may use the funds to either make a down payment for a new house or finance it completely.
• You can start early and invest regularly for your child’s future. Your investments may help cover education expenses when needed.
• Start investing for retirement early. Over the years, your money may grow to support a comfortable life after you stop working.

3. Creates Financial Security

Life can be unpredictable, and expenses can pile up at any moment. Investments, in these situations, may help improve financial preparedness. Invested money offers potential support, whether it is an emergency, unexpected expenses or future planning.

Types of Investments You Can Start with

Here is a list of all the assets that you can invest in:

1. Stocks (Shares)

Purchasing stocks is the equivalent of owning a small part of a company. There are two ways of making money: when the company grows, the stock price increases (capital gains), and when the company pays dividends, which are the profits of the company paid to the shareholders. Stocks may yield high returns, but they may rise and fall very fast; hence, they are riskier.

2. Bonds

Bonds are like lending money to a company or the government. They, in turn, charge regular interest and give you back your initial money at the expiry of the term. Bonds are considered to be safer than stocks, but the returns are typically lower. They are also suitable for individuals who prefer lower volatility, although risks still apply.

3. Gold

Gold is a common and conventional investment type in the world. You can purchase physical gold (coins, jewellery, bars) and hold it for the time being. Gold prices can fluctuate, and gold is often considered a defensive asset in times of economic uncertainty or inflation.

4. Real Estate

The returns of investing in property, such as houses, apartments or commercial spaces, can be in two forms: rent and property price appreciation. Investing in real estate requires more capital, but it is a long-term and solid investment.

5. Mutual Funds

Mutual funds combine the funds of numerous investors and invest them in a combination of stocks, bonds, or other assets. It is easier because a professional fund manager tackles the difficult task of strategising on your behalf. It may provide returns over the long term based on the kind of fund you invest in (equity, debt or hybrid).

6. Fixed Deposits (FDs)

FDs are bank accounts in which you deposit your money at a specified rate of interest over a specified time. They are highly secure and offer predictable returns, though returns may be lower than inflation over time.

How Much and When to Start Investing: Investing For Beginners

The biggest myth regarding investing is that you need a huge sum of money to start investing. The fact is that you can begin to invest even with a small sum, and it is better to invest early than to wait till you have more to invest. Here is how much and when to start investing:

• No Minimum or Maximum Amount: Investing does not require much to start with, as you can start with a relatively low amount. There are numerous investment opportunities, such as Mutual Funds via a Systematic Investment Plan (SIP), which you can begin with small sums.
• Start Early: The sooner you invest, the more time your money has to potentially grow due to the effect of compounding.

Simple Steps to Start Investing: Beginner Investing Guide

The following is an easy guide to investing as a beginner in four simple steps:

1. Set a Clear Goal: You need to determine what you want to accomplish before you invest. Are you saving for:
   1. A house
   2. Your child’s education
   3. Retirement
   4. An emergency fund
2. Know Your Risk Level: Various investments have varying degrees of risk. Ask yourself:
   1. Can I manage an increase and a decrease in my investment value?
   2. Will I be satisfied with gradual, consistent growth, or will I prefer greater, quicker returns?
3. Select a Basic Investment: To begin with, the simple and lower-risk ones are recommended to beginners:
   1. Gold as a security and inflation hedge.
   2. Fixed Deposits (FDs), which are generally considered lower risk but do not guarantee returns above inflation.
   3. Mutual Funds via a Systematic Investment Plan (SIP), which may offer long-term growth depending on market performance.
4. Invest Regularly and Be Patient: Even small regular investments may increase over time due to the effect of compounding. Be patient, and avoid reacting to the temporary fluctuations in the market.

Conclusion

Investing is one of the commonly used methods of seeking long-term financial growth. Even little sums, spent habitually and prudently, can contribute in the long run. It not only may help mitigate inflation risk but also supports long-term financial planning.

The key, however, is to start early and always diversify your investment by spreading it across different asset classes. Anyone can begin their path to financial growth by learning the fundamentals and taking small incremental steps towards achieving their financial goals.

Disclaimer: This article is for educational purposes and is not a recommendation to buy, sell, or trade any security, currency, or financial instrument. Past performance does not guarantee future results. Investing involves risk, and you should ensure you understand the characteristics and risks of any financial instrument before trading.