Investing Explained
The idea of investing can seem very intimidating but it does not have to be.
An investor needs to understand the 5 w’s of investing to conquer their fears and learn how to use it to their benefit.
Who What Where When Why
This post is written in a simple format that I hope will allow investors of all experience levels to reap the rewards of long term investing.
Who is involved in investing?
Investing can be analysed from 2 perspectives; the company seeking investment and people making investments. (governments also seek investment via bonds, but I will talk about them in another post)
When a company has grown very large but has run out of options to raise money to expand their business (after banks, friends,family are tapped out) they can choose to sell a portion of themselves to the public.
That is what is called “going public.”
They sell themselves to the public in the form of shares of stock.
When the company sells shares of stock they get to keep the proceeds from the sale–that is how they raise the money to to expand their business. (To learn all the details about “going public” click here) (link not endorsed by IFS)
The people who buy the shares of stock are the investors.
Right now there are around 4,000 companies who have their stock available to purchase in the US.
(Great article on public companies from bloomberg) (link not endorsed by IFS)
What is investing?
Investing is the act of exchanging money for “something” with the expectation of it increasing in value or providing an income. Yes, above we spoke about stocks specifically, but in reality, investing can involve the purchase of anything. As long as the item is purchased with the possibility that it may increase in value over time, or pay back an income stream- it is an investment!
Obvious examples are: stocks, bonds, mutual funds and real estate. Not so obvious-precious metals, art, wine, baseball cards…etc..
If you are buying “it” for growth or income-you have made an investment.
If you are buying “it” because you love the way it looks/feels–you have NOT made an investment.
No one wallpapers their house with their stock portfolio statements. (catch my drift!?!)
The act of investing is the ultimate delay of gratification.
Where can you invest?
I am not going to tell you what to buy–other than to build an appropriate portfolio based on your goals, time horizon and risk tolerance.
Ultimately, you can purchase investments online, with an advisor, at a bank, or at the flea market (like old watches) etc.
When should you invest?
No matter what you are investing in, do not invest until you have built up an appropriate emergency fund.
Because your investment can up AND down, its important to have a cushion to fall back on. The last thing you want is to have to sell your investments to pay the mortgage…when they are down 30%! If you need help saving, here is a post I wrote that lists 25 ways to save!
Why should you invest?
2 words – compound interest.
Compound interest is the magic of your money making money. Buy making investments, you are giving your money the OPPORTUNITY (not the guarantee) to grow and hopefully grow exponentially.
(compound interest calculator here)
Investors want the law of supply and demand to work for them to get their money to grow.
When there is a limited supply of something and high demand the value will grow!
Example–there is a limited amount of shares of apple stock, a limited amount of Michael Jordan rookie cards. Over the years if the demand for both items stays constant, the value of the investment can continue to grow.
and why is growing your money important?
Breaking news—it isn’t just about having more money!!
When your money makes money and you allow it to grow for the long term, you can actually reduce the amount of money you have to save!
Think about that.
Example:
if you need $1,000 by the end of the year–you can either take $1,000 from your income or your investments can grow by $1,000, which one affects your lifestyle more? (not a real scenario)
Of course, taking the money from your income!
So you can use your investments to grow your wealth without having to make as many financial sacrifices along the way.
Public Service Announcement– Investments do go down in value too, so you need a smart plan to be prepared for all scenarios and think LONG TERM.
Final Thought
You can spend years trying learn everything there is to know about making investments. The who, what, where, when and why of investing gives you a nice jump start.
As always, you can consult with me to discuss your investing plan.
Look for future posts on the best ways to protect yourself financially and check out my recent post on socially responsible investing.
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Thanks for stopping by and I hope you achieve financial success!
