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What is investing? Investment for beginners

Posted by Dan Goodman on December 07, 2022 Dan Goodman

For beginners, investing is important. It's essential to understand the basics of investing and decide if it's right for your needs.

For beginners, there are many opportunities for investments. One misconception about investing is that it's only for the wealthy. In the past, this might have been true. Companies and services have taken away the barrier to entry by making investment options accessible to everyone, even beginners. There are so many investment options available that there is no reason to miss out. This is good news because investing can help you grow your wealth.

Inflation is usually not matched by savings rates. Many people invest to plan for the future. You can't know what you'll make, unlike savings. It's crucial to understand the basics of investing and decide if it is right for you. This guide will help you understand the basics of investing, as well as what to expect. It also includes some rules to keep in mind.

  • What is investing?
  • How Does Investing Work?
  • What Are the Basic Types of Investments?
  • What can you invest in? 
  • What are shares or stocks?
  • What are bonds?
  • What are commodities?
  • What is Real Estate?
  • What are funds?
  • What are Mutual Funds and ETFs?
  • What do you want from an investment?
  • Is investing right for you?

What is investing?

Investing is a way to put some money aside for the future, and then make it work for you. Investing means that you are buying into something that you believe will grow in value over time. An investment can yield a higher return than savings. You don't need to lock your money away. However, it is important to keep it aside for at most 5 years in order to allow it to grow. Keep in mind that the value of an investment can fluctuate so you might get less back than what you put in.

In a wider sense, investing is also about spending money or time to improve the lives of others. Investing is the acquisition of securities, real property, or other valuable items in pursuit of income, capital gains, or income.

How Does Investing Work?

The most simple way to think about investing is buying an asset at a low price and selling it at a higher cost. Capital gains are the type of return you receive on your investment. Making money investing is as simple as selling assets and realizing capital gains.

Appreciation refers to the process of an investment gaining in value between the moment you purchase it and the moment you sell it. Stock can appreciate when companies create a hot product that drives sales, raises revenue and increases its value.

Corporate bonds could appreciate if they paid 5% annually and the same company issued new bonds at 4%. This will make them more attractive. If the U.S. Dollar falls in value, a commodity like gold can appreciate. This will drive up demand. If you remodel a property or make the neighborhood more desirable for young families, a condo or house might increase in value.

If you invest in income-generating assets, you can also make capital gains or appreciation. Instead of making capital gains from the sale of an asset, income investing seeks to acquire assets that generate cash flow over the long term and to keep them indefinitely. Many stocks pay dividends. Dividend investors don't have to sell or buy stocks. They can instead hold stocks and reap the dividend income.

What Are the Basic Types of Investments?

Investors can choose to invest in stocks, bonds, or commodities with the hope of gaining appreciation. These basic securities are not the only ones that you can invest in. There are also mutual funds and exchange-traded funds (ETFs), which buy different combinations of these assets. These funds can be used to invest hundreds of assets or thousands.

What can you invest in? 

There are many types of investments, from the common ones like gold, property, shares, or stocks, to more niche ones such as art, wine, cryptocurrencies, or other cryptocurrencies. The answer is almost everything. Let's explore.

What are shares or stocks?

Shares are units that give you ownership of a company. You buy shares to purchase a small percentage of a company. Shares are sold by companies to raise capital, which is then used to expand their businesses.  Shareholders are those who can buy or sell shares on the stock exchange at any time.

The company's performance or expectation of performing well will drive up demand for its shares, which in turn will push its share price higher. The share price of a company that does not perform well or is expected to do so will usually drop. The wider economy and interest rates can also impact share prices.

The share price affects the value of your investments. While your money can grow, so it is possible to get less back than you invested. Stock is sold by companies to raise capital to finance their business operations. You can buy shares of stock to take part in the company's gains and losses. Dividends are small, regular payments that companies make to shareholders who own stocks.

Stocks are riskier than other investments because there is no guarantee of returns and the possibility that individual companies will go out of business.

What are bonds?

Bonds enable investors to "become a bank." Investors can borrow money from investors when companies or countries need capital. They do this by issuing bonds. You are lending money to an issuer when you invest in bonds. The issuer will pay you back the amount you borrowed and a fixed rate return.

Bonds are known as fixed-income investments because they offer a guaranteed return and are usually less risky than stocks. However, not all bonds are safe investments. Companies with poor credit ratings may issue bonds, which could increase the likelihood of defaulting on their repayments.

What are commodities?

Commodities include commodities such as agricultural products, energy, and metals including precious metals. These assets are often the raw materials for industry, and their values depend on market demand. For example, wheat prices might rise if there is a flood.

If you buy "physical" commodities it means that you have to hold large amounts of oil and wheat as well as gold. However, this is not how most people choose to invest in commodities. Instead, investors use options and futures contracts to purchase commodities. You can also purchase shares or ETFs that invest in commodities.

Commodities can present high-risk investment opportunities. Options and futures investing can often involve trading with borrowed money. This increases your risk of making mistakes. So, buying commodities is usually reserved for more experienced investors.

What is Real Estate?

Real estate can be purchased as a house, a building, or a piece of land. Real estate investments come with varying risk levels and can be affected by a variety of factors such as economic cycles and crime rates.

If you are looking to invest in real property without owning or managing it, then you might want to consider purchasing shares in a real estate investment trust (REIT). REITs are companies that make income from real estate. They pay higher dividends than other assets like stocks, but they have a history of paying higher dividends.

What are funds?

Funds can be used to make a variety of investments. Funds are a way to invest in a variety of assets. These may include cash, property, bonds, and shares. You don't have to choose the best investments for you. Funds can help you do that.

Funds are great because you don't have to put all your eggs in one basket. Your money is invested in a variety of investments. Diversification is a way to spread your risk. This is because, if one fund's investments perform poorly over a period of time, other funds may do well.

There are two main types of funds:

  • A professional fund manager manages an active fund or multi-asset funds. They choose which assets, bonds, or shares to hold and then monitor them for you. The fund manager's experience is paid extra to ensure that you receive returns that exceed the market.

  • Index funds or passive funds are simply index funds that track or follow a particular market or index. Passive funds typically charge less because there is no direct involvement by the fund manager. There are many risk levels in funds, from the 'cautious’ fund at the lower-risk end to the 'adventurous’ fund at the higher risk.

You may be younger and have more time to weather any storms. If this is the case, you might consider an adventurous fund. Your investments may have less time to recover after any dips as you approach retirement. Therefore, a conservative fund might be better.

What are Mutual Funds and ETFs?

Mutual funds and ETFs invest according to a specific strategy in stocks, commodities, and bonds. ETFs and mutual funds allow you to invest in thousands or hundreds of assets simultaneously when you buy their shares. ETFs and mutual funds are generally safer than individual investments because of this easy diversification.

Although mutual funds and ETFs both are types of funds they work differently. Mutual funds can buy and sell many assets. They are often actively managed by investment professionals, which means that they choose what to invest in. Mutual funds are often trying to outperform benchmark indexes. Mutual funds are generally more costly to invest in than ETFs because they have active and hands-on management.

  • ETFs can also include hundreds to thousands of individual securities. ETFs do not attempt to beat any particular index. Instead, they try to replicate the performance of that benchmark index. This passive investment approach means that your investment returns won't exceed the benchmark performance.

  • ETFs are less expensive than mutual funds because they don't have to be actively managed. In the long term, passive and benchmark indexes have performed better than actively managed mutual funds in the past.

What do you want from an investment?

There are two main ways you could make money as an investor: through growth - also called 'accumulation - and via an income. This is how you can decide between an investment fund and an accumulation fund.

  • An accumulation fund's income can be reinvested inside the fund. This will increase the chances of your investment growing over time.

  • With an income fund, all income the fund generates will directly be paid to you Investing for growth can be beneficial if your investment time is longer. Accumulation funds may offer higher long-term returns. If you are in your final years of life, investing for income can be a great short-term strategy. If you choose funds that pay out dividends, regular payments can be made to increase your current income or pension.

If you're looking into shares, make sure you decide whether you want to invest with the goal of either growth or income. Be aware that it can take time to invest in shares and you would need to maintain a portfolio of different stocks to limit the risk of losing cash with one company.

Is it right for me to invest?

Ask yourself a few questions to figure it out.

1. What's your current financial status?

If you have unsecured debts that are interest-bearing, such as credit cards or loans, you need to pay them off. Before you start investing, however, you can also save some money. A good goal is to have an emergency fund equal to three to six months of your current living expenses. This would ensure that you have enough money to cover unexpected expenses and not need to dip into any investments.

2. What are you aiming for?

If you want to make enough money in the short term to pay for a vehicle, a vacation, or a wedding, then investing is probably not the best choice. If you're looking to put money away for a longer-term goal, such as a child’s education or greater flexibility later in life, investing might be a good choice. The quicker you get started, and the longer that you can keep your money invested in the long term, the more time it has for growth and recovery from any bad times.

3. What is your opinion about risk?

You can't put your money into an investment that isn't risky. You are investing your money in something that you think will increase its value. But there are no guarantees. You will be exposed to the market's uncertainties which could mean that the value of your investments can and will fluctuate, meaning you could get less back than you invested.

Investments are both risky and rewarding. As a rule of thumb, higher-risk investments like shares or investing in private companies have the potential to bring you higher rewards. Lower-risk investments will usually bring you lower rewards.

You don't need to invest much at first. This is a good way for you to try out the market. This way you can see what happens to the investment, and you have the option to invest more later.


“My mind seems to have become a kind of machine for grinding general laws out of large collections of facts.” —

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