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1. Investing: What it means, How
it works and What you need to know
While most people are familiar with the term saving, and
probably have an account or two with a commercial bank or
a credit union, others are intimidated when we talk about
investing, which seems to bring to mind images of financial
genius, reserved for a chosen few. In fact investing is not
a complicated concept, and the majority of investors are individuals
just like you and me, preparing for their children’s
college education, planning their retirement, making arrangements
to pay off a mortgage or simply trying to generate additional
income.
Saving and investing have similar objectives. Saving is about
putting away the money you have, while taking only minimal
risk. So you work hard, get extra cash and put the money in
a safe place. Investing is using the money you have to make
more money. Because your expectations for returns are higher,
there is greater risk involved, but these can be minimised
with careful planning.
Here are some simple guidelines to consider when investing.
The first is a well known saying “Don’t put all
your eggs in one basket”. Investments take many forms,
from stocks or shares, treasury bills, bonds, notes, to art
or real estate. It is always best to spread your investment
over a variety of products with the potential to do well.
Second, Understand your choices. Research the various options
open to you. All potential investors need to understand how
financial markets operate, the financial instruments that
are available, the terms and conditions that apply and the
benefits that they offer. Try to remember that “all
that glitters isn’t gold”, so if something sounds
too good to be true, it probably is.
Next set aside small sums regularly, rather than investing
large sums periodically. “One one penny full basket”.
But careful planning is essential. Assess your personal financial
situation and examine your monthly income against your monthly
expenses. Determine how much money you need for routine expenses
such as food, shelter, health care, transportation, and entertainment
and set aside something for emergencies. Any money left over
is the amount you can afford to invest.
The next step is determining your personal investment objectives.
Decide how long you will invest for, and whether you wish
your investments to grow slowly but steadily over time, or
whether you wish to make quick money, or perhaps even a mix
of both. How much do you wish to make and how much risk are
you prepared to take? Investments vary in risk, and high-risk
instruments usually yield more attractive returns. However,
keep in mind that the greater the risk, the more likely you
are to lose your investment.
These are important steps in building a portfolio that matches
your needs and your pocket! Nothing matters quite so much
as developing an investment plan and having the discipline
to stick with it. Weaving in and out of different investments
is a recipe for financial disaster.
Most of us know where to go if we wish to invest in a motorcar,
or real estate, and how to go about opening a savings account
with a commercial bank, but we are at a loss in knowing what
to do when we wish to buy stocks or shares or other financial
instruments, which are traded in the securities market. This
is where investors or buyers, people like you and me, with
a little extra cash and companies or governments, the sellers
who need money and have investment products to offer, transact
their business.
The securities market can be unorganised, with the buyers
seeking out the sellers to effect a trade among themselves,
or it can be organised, with a central point, called a securities
exchange at which trading takes place, usually with the help
of agents called brokers or broker-dealers. In this series
we will look at investing in an organised securities market.
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Investing: What it means, How it works and What you need to know