We all save money to buy something that we really want, but though we keep on putting aside a little every week, the money is stagnant. This is where investment comes in. It is crucial to know the difference between investments and savings. Money which is saved up in a bank or piggy bank is dormant. But something which you want to buy at 10 today, will soon become a little more over time due to a process called inflation. Therefore, you need to invest, so you can grow your money alongside inflation.
Financial jargon, such as investments, risk-diversification, portfolio, inflation, etc. does seem exceedingly daunting at first, but really, it is surprisingly simple.
What is investment? There are many different types of investments like financial, time investments, etc. In this article I will only be focusing on financial investments. Financial investment is the process of putting away your money now so that you can grow that money and enjoy it in the future.
How do you start investing? First, you have to open a trading/depository account with a bank. You will also need some money to start with. This could be some money given/gifted to you, a little bit of your pocket money set aside every week, etc.
Your bank will give you a variety of investment options to buy. Then, depending on your capital and your risk appetite, you can choose high-risk or low-risk investments. High-risk investments are investments which might give you very high returns, but can also be associated with high loss. The most common type of high-risk investments are shares (investing in individual companies to grow your money). Some types of low-risk investments include bonds, fixed deposits, etc. These will not give you much return, but the return they promise is guaranteed.
It is important to understand the concept of Risk-Diversification. This means spreading out your risk. The famous quote: ‘Don’t put all of your eggs in one basket’ encompasses the concept of ‘Risk Diversification’ aptly. If one investment doesn’t turn out well, you have many more investments to rely on. For example, if you have 100, and you invest it all in one company, if that company doesn’t do well, all your money is gone. On the other hand, if you invest 20 in 5 companies, if one of them doesn’t do well, you still have 80 to rely on.
If you do not have much time or expertise to analyse the company’s sector, profits, losses, potential, etc, then a good way to diversify your risk is to invest in funds (ETFs, mutual funds, etc). These are organisations which have experts who analyse every little detail about a company and invest in them for you so that you have the best return on your investment as possible. One fund will invest in many companies to diversify their risk.
As you can see, investing opens up a whole new opportunity to grow your money, and all it takes is a bit of money to start with, convincing your parents to open a trading account, and some time.