What is investing in simple terms
What do we do with the unclaimed money? There are usually several options: surplus purchases, a safe, a bank deposit, currency. But there is a professional thief that none of the above storage methods will protect you against: inflation. For finance to maintain its value and generate income, it must work. A great tool for this is investments.
Bank deposits can hardly be called investments, because you can hardly make money from them. A deposit is nothing more than a deposit in which the bank uses citizens’ money for its own purposes, paying a small interest rate (so small that it does not cover real inflation).
Investing capital in projects, companies, events, real estate or securities in order to obtain a significant return on the money invested is what investment means. It’s more risky than keeping money in a savings account, but the risk is minimized when the right investments are made.
The parameters of an investment
For an investment to be profitable, the investor must know where his money is going and how it is going to work. To do this, the parameters of the investment object must be carefully studied.
Return on investment is one of the most important criteria for an investment. It’s the first thing investors notice. Profitability refers to the potential profit that the money invested can bring.
Risk is as important as profitability. Sometimes the huge rate of return an investment promises is due to the high risk of losing the entire investment. On the contrary, the lower the percentage of return promised to an investor, the more secure the funds will be.
Liquidity tells you how quickly you can get your money back without losing some of it. In other words, the asset must be in demand and available in its niche.
Period: some investment projects imply that for some time the invested capital will not be available for return (or if it is, it will be with significant losses in the form of commissions or penalties). The terms of such restrictions should be studied with the greatest possible care.
Entry threshold: everything related to investments has limits in terms of the amount of capital. For example, not all retail investors can afford to be clients of a venture capital fund (the lowest checks start at around $ 500,000).
Simplicity: sometimes the object of the investment is complex. If an investor has difficulty understanding how the instrument in which the capital is invested works, it is better to deal with this problem. Not understanding an instrument can cause funds to be invested in an unprofitable asset.
Each parameter must be considered in relation to a specific investment sector. The best option for an investor is a harmonious combination of all the mentioned conditions.
Sometimes keeping your hard-earned money “in the money” can be extremely disadvantageous, because in this case the savings will slowly depreciate due to inflation. And, as practice shows, inflation can not only be a slow process, but at certain times it can rise sharply or, as they say in the financial environment, gallop.
In fact, we have already seen a sharp depreciation of money in 1998, 2008 and 2014, when the purchasing power of the ruble fell sharply. And smart investing can act as a reliable shield against those shocks.
While return and risk are intuitive parameters, liquidity and capital intensity are worth looking at in more detail.
Liquidity is the ability to make and withdraw investments quickly and without losing profitability. And in fact, it is important because money may be needed in the here and now at some point. And, for example, it can take more than a month to sell an apartment (bought for investment purposes) without losing profits. Or withdrawing the deposit before its completion may result in a loss of interest, which reduces the overall return on the investment.
Speaking of risks, it should be noted that they can increase from time to time. For example, buying a property during the crisis in the “foundation pit” phase can be more risky, as construction companies can also go out of business, and waiting for another developer to rescue the foundation pit can take a long time. Even bank deposits during license revocation can sometimes “add adrenaline” to an investor’s life.
Yields are a more volatile parameter that, as time and the housing market show, can give way and the US dollar can depreciate against the ruble. However, there is a wonderful attribute that can be gained in the investment process: experience and the development of financial knowledge. An active investor is increasingly aware of the economic reality and begins to choose and use his investments better.
If the question of what is meant by investments is answered, the answer will be that the money is invested in investment objects with the aim of making a profit. And these objects have several properties. Let’s look at the basic objects of investment.
Bank deposits are probably the most traditional investment object, with a return comparable to key interest rates. The advantages are availability and clarity, convenience and the fact that DIA insures deposits up to 1.4 million rubles. The disadvantages are low returns that do not protect against inflation, low liquidity (penalties for early withdrawal) and inelasticity of terms. If inflation rises “suddenly”, the interest on the deposit remains the same, and to move to another deposit (more profitable) you have to withdraw the existing one (often with a loss of interest). And that the risks of the banking sector tend to increase in times of crisis.
Buying real estate is considered one of the safest investments, but that is not always true. It is often said that this is because buying a property means investing over a long period of time, and it is not necessarily true that the property performs better in that period (and compared to everything else). The positive side is that you can say that, for example, no one will take the license of the apartment: it is your property. The property can be rented and also received income, and then you can pass it on to your children. The downsides are the low liquidity, the time involved in this type of transaction (it is not easy to find a decent property), the relatively high cost and the fact that the real estate market can also experience declines.
What are investments? It is the financing of various assets in order to generate income. In the example above, the chicken is the asset (the source of profit) and the eggs are the profit itself. If there are several chickens, it is a capital, and in the stock market it is an investment portfolio.
The difference between “investing” and “accumulating”
They are two completely different processes. Accumulating means keeping money “in the drawer.” Over time, inflation will eat up some of the money. Investing helps you save and grow your capital. It gives you the security of a stable future.
Where to get money: credit or savings
The main question investors ask is: should you borrow from a bank or save money yourself? The advantage of a loan is the possibility of obtaining a significant amount at one time. The downside is that you will have to pay the money back, plus interest. But if you have your own funds, you will not have to answer to anyone and you will not go into debt. The disadvantage is that it is not easy to save the initial amount to invest.
From which you can create an initial capital:
additional income: bonuses and bonuses at work, self-employment;
Spending reduction: avoid unnecessary expenses: leisure, impulsive purchases;
Statistically, around 30% of the monthly budget is made up of non-mandatory expenses.
The waste of your salary: you don’t have to spend it, you can invest it;
Special item of expenses: each month reserves a certain amount to invest.
Experts believe that the latter method is the most correct and effective. And they add that you can invest even with a small capital.
Investing in securities
If we take the 30 most successful and richest people in the world, a third of them raised capital in investments in securities. The offer of financial instruments in the stock market is quite wide: stocks, bonds, futures, options, promissory notes and investment funds.
All investments are divided into short, medium and long term:
Short term. The most profitable and risky. In fact, you buy cheaper and sell more expensive and you pocket the difference.
In the medium term. Less profitable and less risky. For investors with a medium income level, who do not pursue quick profits.
Long-term. The most reliable and predictable. For those who want to save and multiply their savings in the long term.
The most profitable tool is stocks. But in order not to lose money, it is necessary to periodically monitor the state of the company issuing the shares. If you are not ready for it or want to reduce risk, it is better to choose bonds. The benefits that are obtained are minor but fixed: the holder of a bond receives an annual percentage of its face value.
Risks of investing in securities
Profitability and probable financial losses are interrelated terms. You cannot get something without paying a certain price for it. If you are not willing to take risks, you cannot expect to make a profit.
The oldest axiom on Wall Street is that there are no free lunches. Prepare not only to win money but also to lose