Compared to savings, where there are little to no risks associated, investing does not come without perils. While experts are able to predict movements within financial markets, there is no certain way to tell if the asset you have invested in will increase or decrease its value.
If you want to, you can think of investments as a form of gamble because, although luck does not play that much of a role in the way the market moves, there are no guaranteed wins either.
If the prospect of investing sounds interesting to you, you surely have lots of questions about the subject. And, who could blame you? With so many investment options available and challenges you will have to face, it is understandable if investing seems like an intimidating environment. Still, once you start learning a thing or two about the market, many of these aspects will prove easier to understand than they seemed at first.
To help you out, we have put together a list of questions many beginner investors have before trying their luck on a financial market. Use them as a guide to decide if investing is right for you and where you should get started.
Why do so many people choose investing instead of savings?
Investing and saving have become almost polarized options, but in reality, they go hand in hand. People save money for a variety of reasons: financial security during retirement, making a large purchase, paying off debt, or emergencies. All of these are perfectly viable goals, but they don’t do much to protect you against one thing: inflation.
If you’ve heard your parents or grandparents nostalgically talk about how cheap gas or housing was back in the day, you have inflation to blame for that. In time, money depreciates, and there is no way to change that. What you can do, however, is put this money to good use and increase your chances of building wealth for the future.
How can investing help? Through a process called compounding. When you compound earnings, it means the money you earn is immediately reinvested so that you can earn more returns. In comparison, when you save money, your returns are not further reused. This is why investing is gaining more popularity among people nowadays.
What type of investments do I have access to?
Most people think the only way to invest money is by putting it in the stock market. While this is one very popular option, it’s not the only one available. There are many assets you can invest in, including mutual funds, bonds, ETFs, forex, and more. In terms of which one is most popular, it depends on the region. Most Canadians, for example, choose to invest in mutual funds, but Americans prefer the stock market.
Truth be told, in today’s digital world and with so many investment platforms available, you can choose to invest in almost anything. Whether you prefer investing in traditional assets, or you want to try something more exotic, such as new technologies, art, farmland, or even vintage objects, the most important thing you need to keep in mind is that your investments align with your financial goal.
So, what exactly is the stock market?
Think of the financial market as if it were a farmers’ market. People come here to sell and buy goods (shares), and each one of them has a limited number of crops for sale.
Shares aid business growth, and people that buy them invest directly into that company. Companies that list shares on the stock market do so precisely because they need capital in order to grow, so they promise investors a small part of their profit in exchange. If you want to, you can keep those shares or trade them for more profit.
When it comes to how shares are priced, the initial price is set by the company offering them, but the price can increase or decrease based on the company’s financial results. For example, if a company registers huge growths in one year, investors are going to be more interested in it, and its share prices will rise. On the other hand, if a company does poorly, stock prices will likely fall.
How much money can I make by investing?
This is one of the first questions people as their financial advisors. Unfortunately, there is no way to tell for sure how big your profits will be and those that tell you otherwise may not have your best interest at heart.
Investing will always be somewhat risky, and even if you made lots of money during a set period of time, there is no way to tell for sure you won’t lose big money in the future. Put simply, past performance can’t be used as an indicator for future achievements, or at least not in the investment sector.
However, if you want to increase your chances of success, there are some rules you should keep in mind:
- If you are hoping for great returns, you need to be open to taking bigger risks.
- Constantly look for methods to diversify your portfolio, be it by experimenting with different financial assets, industries, or companies.
- Review your portfolio periodically and get rid of assets that are losing you money.
- Keep your emotions under control, and never base your decision on hunches alone.
Is investing a right a suited option for me?
The only one that can decide if investing is right for you is yourself alone. No financial advisor, expert investor or self-made billionaire will be able to tell you if investing is a suited activity, as this depends a lot on aspects such as your risk aversion, personality, financial goals, and other personal circumstances.
Over time, investments have outperformed savings in terms of building wealth, but there is no way to know for sure what the future will bring. If your plan is to save, say, $25,000 over the next ten years so that you can pay for your child’s education, investing can be a good option. However, if your financial goals are more short-termed, such as renovating your house, setting some money aside may turn out to be a more practical solution.