Have you ever wondered how some people grow their wealth without working extra hours on the job? The answer lies in investing. Most people often think that investing is only for people that already have a large amount of money. But the truth is, anyone can start investing with a small amount of money and the right resources/knowledge
Investing allows anyone to slowly and steadily increase their wealth, which can lead them to better financial prospects. This blog will go over how a person without any knowledge or resources can start investing.
What is Investing?
Investing is the act of putting your money into multiple assets that have the potential to increase in value over time. Unlike putting your money into bank accounts, which gives minimal interest over a set period of time, investing into assets like stocks, bonds, mutual funds etc. gives investors the opportunity to generate higher amounts of interest on their investments.
For eg. If the company whose stocks you bought had a net positive growth, the prices of your stocks will also grow, which you can later resell at a profit.
Although investing can be sometimes risky, with the right tools and knowledge, you wealth will definitely grow in the long term
Why should you start investing early?
One of the biggest and best advantage that beginners have over others is time. The earlier one starts to invest, the quicker they gain the knowledge required to invest. They can also start taking advantage of compound growth
Compound return means that not only do you earn interest on the invested amount, but also on the returns that you’ve already earned. For eg. Investing in small amounts earlier in life can lead to a higher overall return than investing large amounts later in life. Starting early also develops healthy financial habits and prevents unnecessary spendings.
Understanding risk and return
Every type of investment carries some risks. Investments with higher risks generally have higher rewards. Beginners should not invest in high risk assets.
They should rather focus on investing in low or medium risk assets to gain knowledge before tackling the high risk assets.
Popular Investment Options
Some popular investment options include-
- Stocks- Stocks are assets of a company represent a percentage in the ownership of said company. The percentage owned depends on how many stocks you have. While stocks are more easily accessible and have potential to grow high, their prices can fluctuate easily.
- Mutual Funds- Mutual Funds basically collect money from various different investors and pool the money to purchase a diverse portfolio of investments which are maintained by professionals. Mutual funds are recommended to beginners since its mostly handled by professionals.
- Exchange Traded Funds- ETF’s are investment funds that are traded on stock exchanges like regular stocks. Many beginners choose ETF’s because of the exposure to the hundreds of companies through a single investment.
- Bonds- Bonds are loans by the government or companies and, in exchange, they get regular payments. While bonds have lower risk than stocks, they also have low, predictable returns
- Real Estate- Investing in property can generate long term passive income easily. The downside of investing in real estate is that it requires significant amount of capital.
How much money is required to start investing into stocks?
A common misconception that a lot of people have is that investing in assets like stock or bonds requires large sums of money. In reality, many online investment platforms allows its users to start with small amounts. The most important habit an investor should have is ‘consistent’. Even small investments every month can grow significantly over time.
Importance of Diversification
One of the most important things to remember before you start investing into assets is to diversify where you invest. Diversification means spreading your investments across different assets, industries, regions etc. This helps minimize any losses.
A diverse portfolio, where you have invested into multiple different types of assets, has a better chance to grow than a portfolio that has invested only into one type of asset.
Common Mistakes
Some common mistakes that beginners should avoid are-
- Trying to time the market- Many new investor try to predict when a particular stock is about to rise or fall. This is a hard task that even experienced professionals struggle with from time to time.
- Investing Without Research- Never invest without researching. One must understand what they’re investing their money into.
- Letting emotion control decisions- Fear, anger, greed etc. can often influence our decisions negatively when the market is going down. Beginners should make sure to not let their emotions take control and be disciplined.