In our society, we need money in various aspects of lives, to fulfill most of our aspirations. Individuals try and save money to serve as a cushion in a number of cases, such as to acquire new assets, to purchase goods, for emergencies, etc. Universally, banks are the preferred medium for holding our savings. This is because:
1) Security: Your money is better safe-guarded by a bank than yourself.
2) Interest: You also earn a stable return for holding your money in the bank.
3) Liquidity: You can withdraw your money at any instance that you desire.
However, the return that you earn on your savings in the bank is quite low as compared to other forms of investments that are available. But then investing money comes with greater risks too. To understand why this is so, let us start with the basics.
What is the meaning of investing?
Investing refers to committing capital in order to purchase assets that could result in profitable returns in the form of interest payments or appreciation in the asset’s value. Some of the most preferred instruments for investing are shown in the image below.
Compared to saving money in a bank account, investments carry higher risks, which they offset it in the form of a higher potential return. It is very important to pay close attention to these risks and assess them, when making an investment. Most investors take calculated risks. I have always advised those close to me, to only invest money that they are comfortable loosing. Expect the best, but prepare for the worst!
Simply saving money isn’t enough. Increasing inflation ends up making goods and services more expensive to purchase, thus eating into the value of your money.
Apart from that, money that is invested can come in handy at a later stage, as explained initially in this article.
Only those who have taken care of their immediate cash needs and are confident of having access to capital, in the event that an unforeseen mishap occurs should invest.
What should you consider before you begin investing?
Successful investing requires careful consideration of a number of factors, along the most important of which are:
- Capital Available: The money you have at your disposal to invest. Even if you loose all of it, the functioning of your daily life should not be affected.
- Risk Appetite: Be sure to assess your ability to digest risky investments.
- Investment Horizon: Perform the required research on how long your money will be locked in after making a certain investment
- Expected Returns: The expected rate of returns is a crucial factor, as it will guide your choice of investment. Based on your expectations and risk appetite, you can decide whether you want to invest heavily into a single instrument or balance your portfolio by diversifying your investments across multiple instruments.
- Market Cycle: The existence of market cycles or trends allows for certain securities to outperform the others. You always want to make an investment when the opportunity is optimal, and exit your investment when the asset has appreciated in value. Buy low and sell high. Market cycles play a big role in achieving this.