Investment is a powerful way to grow your savings – in many cases, more powerful than the standard routes by which savings might accrue value. But as a beginner to investing and investment principles, it can be easy to feel confused by the various options available to you, let alone the language used to describe the more complex elements of stock markets and financial systems.
Here, some of the more beginner-friendly routes to investment are explained in simple terms, to help you make an informed decision about how you would like to start being more active with your money.
What is Investing?
First, though, it is important to define what ‘investing’ means. Many people will associate investing with the hectic scenes from the floors of the London or New York Stock Exchange, as brokers urgently close deals over the phone in the face of endless graphs and figures. While there are ways for the average individual investor to engage with stock markets this way, this isn’t investing as you should understand it; this is trading.
Trading involves the buying and selling of stocks, shares and assets during a given day to ride movements in their value, with the aim of profiting from price movements – buying low, and selling high. This involves an extremely high level of risk, though, even for traders with decades of market experience.
Investing seeks to achieve the same ends, but with lower risk; you are purchasing something of value in the hopes that it will grow in value over time, ideally at a rate that beats bank interest rates or even inflation rates. There are numerous ways to think about doing this, and numerous resources to help you along.
Investment and Advice
Given the complex nature of many financial and investment instruments, it can be a shrewd move to speak to a financial advisor – or even to entrust money for a third-party broker to manage on your behalf. But this can introduce an additional level of risk, particularly through negligent advice or handling of your money. Financial negligence is not common, but can have an impact on your short-term finances (at least, before compensation is awarded); quite simply, it pays to be vigilant with your money.
Routes to Investing
Stocks and Shares
While day traders might flit around the stock market on a moment-by-moment basis, you as an investor might ‘go long’ by buying a set amount of shares and holding onto them. If there was an individual business in which you had faith, you might choose this business to place your investment. This is how early investors in businesses like Apple grew their fortune. But success stories like Apple are rare and unpredictable.
Index funds are a way to engage with the stock market without assuming the high risk of putting all your eggs in one basket. These funds pool businesses together, and automatically split your investment between them – the result being a spread of risk, and a more consistent pattern of growth and returns.
Investment doesn’t require you to engage with these institutions, though. Owning property is an investment, and in many ways a shrewder one than any investment you make in the stock market. This investment requires more capital, though, and is more difficult for those with less money to achieve.