Here is my promise, at the end of this article you will be exposed to things about investing you don't know now, and something about those things you'd know would make a huge difference in your life.
Basics on Investing
Have you ever wondered how the rich got their wealth and then kept it growing? Do you dream of retiring early (or of being able to retire at all)? Do you know that you should invest, but don't know where to start? If you answered "yes" to any of the above questions, you've come to the right place.
In this article the practice of investing will be uncovered from the ground up. The world of finance can be extremely intimidating, but I firmly believe that the stock market and greater financial world won't seem so complicated once you learn some of the lingo and major concepts.
It should be emphasized, however, that investing isn't a get-rich-quick scheme. Taking control of your personal finances will take work, and, yes, there will be a learning curve. But the rewards will far outweigh the required effort.
Regardless of your personality type, lifestyle or interests, this article will help you to understand what investing is, what it means and how time earns money through compounding.
What Is Investing?
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.
Quite simply, Investing is putting your money to work for you.
Essentially, it's a different way to think about how to make money. Growing up, most of us were taught that you can earn an income only by getting a job and working. And that's exactly what most of us do. There's one big problem with this: if you want more money, you have to work more hours.
You can't create a duplicate of yourself to increase your working time, so instead, you need to send an extension of yourself - your money - to work. That way, while you are putting in hours for your employer, or even mowing your lawn, sleeping, reading the paper or socializing with friends, you can also be earning money elsewhere.
What Investing Is Not?
Investing is not gambling. Stocks are not lottery tickets. Gambling is putting money at risk by betting on an uncertain outcome with the hope 4 that you might win money. True investing doesn't happen without some action on your part. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping Lady Luck is on your side.
Why Bother Investing?
Obviously, everybody wants more money; No one wants less. Simply put, People invest because they want to increase their personal freedom, sense of security and ability to afford the things they want in life.
However, investing is becoming more of a necessity. The days when everyone worked the same job for 30 years and then retired to a nice fat pension are gone. For average people, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle. There is much debate over how safe our old-age pension programs will be over the next 20, 30 and 50 years. But why leave it to chance? By planning ahead you can ensure financial stability during recessions, depressions, and in uncertain times.
What can you invest in?
I've assembled here seven Investment vehicles; I am not pretending this is an extensive list
· Bonds
· Stocks
· Mutual Funds
· Exchange Traded Funds(ETFs)
· Index funds
· Treasury Bills
· Real estate
· Bonds: When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out. If you are buying bonds from a stable government/company, your investment is guaranteed, tax-free, and in most jurisdictions bonds can act as collateral for loans.
· Stocks: Stock is ownership in a company. Stock is sold in units called shares. A person that owns stock is called a shareholder or stockholder. Think of the company's ownership as a Pizza. Each slice in that Pizza pack represents shares in a company. When you buy the shares of a company, you own a slice of that company. The size of your slice depends on the amount you paid in comparison to what the whole Pizza cost. When you purchase stocks, or equities, you become a part owner of the business. This 6 entitles you to vote at the shareholders' meeting and allows you to receive any profits that the company allocates to its owners. These profits are referred to as dividends.
· Mutual Funds: A mutual fund is a collection of stocks and/or bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select securities for you. The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment.
· ETFs: Fund that tracks an index, but can be traded like a stock. If stocks were fruits, this would be an investor's smoothie. ETFs are often used by investors to diversify their risks. Some investors prefer to own stocks in exactly one company. Others prefer owning the whole industry. Investors who prefer the latter would buy an ETF. Like a smoothie, there are different flavours of ETF: it can be a certain industry (retail or consumer services), a certain region (China or Frontier/Emerging market stocks), or certain market (buy the whole of the US market or the Chinese market). These ETFs are designed by fund managers with experience studying the stock market.
Who invests?
1. Central banks
2. Commercial banks
3. Sovereign wealth funds
4. Endowment funds
5. Multibillion dollar companies
6. Individual investors
7. Institutional investors
8. Universities, churches, pension funds, insurance companies…
Who is an intelligent Investor?
According to Benjamin Graham, Father of value investing. An "Intelligent" investor is an individual who is patient, disciplined, and eager to learn; one who is able to harness his emotions.
Movement in the prices of stocks
Stocks go up and down because of supply and demand. Prices go up when there are more buyers than sellers. And prices go down when there are more sellers than buyers.
What is an Initial Public Offering (IPO)?
The first issuance of common shares to the public by a formerly private corporation. It's when a company first sells its stock to the general public. In an IPO, a stock begins trading on a stock exchange such as the Nigerian Stock Exchange (NSE), New York Stock Exchange (NYSE) and the NASDAQ.
What are Stock Symbols?
A stock symbol is the shortened way of referring to a specific stock. It is sometimes called a ticker symbol or stock ticker symbol. Each stock has its own unique symbol that investors can use to ensure that their trade is placed accurately. Another way to think of them is unique nicknames or usernames for stocks. They're usually between 1 to 5 characters long 9 but can be longer. A ticker symbol can refer to stocks, ETFs, mutual funds and other securities.
What are bull and bear markets?
Bull and bear markets are simple investing lingos used to describe the movement of stock prices. It describes positive feelings (bull) or negative ones (bear). "Bull" positivity or "bear" negativity can be used to refer to the whole stock market or individual stocks.
BEAR MARKET: Period of sustained stock market decline.
BULL MARKET: Period of sustained stock market growth.
What is compounding?
Albert Einstein called compound interest "the greatest mathematical discovery of all time". Others call it the "eighth wonder of the world". The wonder of compounding (sometimes called "compound interest") transforms your working money into a state-of-the-art, highly powerful 10 income-generating tool. Compounding is the process of generating earnings on interest earned on principal plus interest that was earned earlier. To work, it requires two things: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment, which takes the pressure off of you.
To demonstrate, let's look at an example: If you invest $10,000 today at a 20% interest rate, you will have $12,000 in one year ($10,000 x 1.20=$2,000 ). Now let's say that rather than withdraw the $2000 gained from interest you keep it in there for another year. If you continue to earn the same rate of 20%, your investment will grow to $14,400/N5,616,000 by the end of the second year. This little bit extra may seem like peanuts now, but let's not forget that you didn't have to lift a finger to earn that $2000. More importantly, this $2000 also has the capacity to earn interest. This increase in the amount made each year is compounding in action: interest earning interest on interest and so on. This will continue as long as you keep reinvesting and earning interest. If your patient enough in ten years', that $10,000 you invested would be worth over N24Bn.
Starting Early
Consider two individuals, we'll name them Pam and Sam. Both Pam and Sam are the same age. When Pam was 25 she invested $15,000 at an interest rate of 5.5%. For simplicity, let's assume the interest rate was compounded annually. By the time Pam reaches 50, she will have $57,200.89 ($15,000 x [1.055^25]) in her bank account. Pam's friend, Sam, did not start investing until he reached age 35. At that time, he invested $15,000 at the same interest rate of 5.5% compounded annually. By the time Sam reaches age 50, he will have $33,487.15 ($15,000 x [1.055^15]) in his bank account. What happened? Both Pam and Sam are 50 years old, but Pam has $23,713.74 ($57,200.89 - $33,487.15) more in her savings account than Sam, even though he invested the same amount of money! By giving her investment more time to grow, Pam earned a total of $42,200.89 in interest and Sam earned only $18,487.15.
What is the Stock Exchange?
The stock exchange is where stocks/shares are traded. Stock isn't sold at a fixed price. The stock market is like a big auction house (open market) with prices changing constantly based on the demand and supply of people buying and selling. Nigeria has over 300 companies on the Nigeria Stock Exchange (NSE). United States has more than 10 exchanges with 25,000+ companies on NASDAQ & NYSE, two of the biggest exchanges.
What are Dividends?
Cash payment to a corporation's shareholders, distributed from current earnings or accumulated profits and taxable as income.
What is Portfolio Diversification?
Portfolio diversification involves spreading your money across different asset classes rather than concentrating all of it in one area, following the proverbial expression that you shouldn't put their eggs in one basket. 13 For example, instead of buying stock in an individual company, you would invest in an index fund, which is a type of mutual fund that holds a variety of stocks tracked to a certain index, such as the S&P 500. The greater the quantity and variety of assets you own, the more diversified your portfolio is. Another strategy for diversification is to invest in both U.S. and foreign stocks. Spreading out your investments geographically might protect you from market volatility concentrated in one area. When one region is in recession, you'll still have holdings in places that are booming
KEY TAKEAWAYS:
· Investing is about making your money work for you, rather than working for money.
· The rich make money work for them, the poor work for money.
· Reinvesting your earnings allows you to take advantage of compounding.
· The more you invest, the more profits you stand to gain.
· There isn't just one strategy that can be used to invest successfully.
· Each investment vehicle has its own unique characteristics, and it risks.
· Diversifying investments in a portfolio helps to manage risk.
· Any fool can be successful in investing, if he cares to know what it takes.
REFERENCES
1. Getting started with stocks By Tosin Osinbudu
2. A Tutorial for Beginner Investors by Investopedia
3. Baron financial guide by John Downes
4. CFA Institute glossary
5. Investment Dictionary by MERCER
6. A guide for investment terminology by Kingdom of Saudi Arabia Capital Market Authority
7. Intelligent Investor by Benjamin Graham
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