Investing your money is the most common way of growing your wealth in the long run. Investing is different than savings in the sense that you are keeping your money away in schemes that usually come in with a lock-in period of a few years and guarantee you a rate of interest on your money. Unlike savings, investments can’t be accessed easily and are usually done to achieve long-term financial goals.
Below I have answered some common questions related to investing those first-time investors may have.
How does investing work?
Investing usually means the purchase of an asset like a stock, real estate, or bond with the expectation that you will get financial returns. The financial gains are generally either of the two: dividends or interest. You also have the option of making money through capital gains when the value of the purchased asset increases.
For example, if you bought a stock for ₹7 per share and sold it for ₹+-20 per share after its value appreciates then you’ve made a profit on your investment. Similarly, you can make money by investing in a real estate property that’ll likely appreciate in value in the foreseeable future.
Why is investing important?
Investing allows you to not just save money but make those savings work for you in the long run and even help you create wealth. This goal is made achievable with compound interest. When you intend to make a significant profit from investing or use it to create your wealth, you’d need to think of long-term goals. It usually takes a minimum of three years to take advantage of compound interest.
If you are planning to put your money away for short-term goals then you should steer clear of riskier investments like the stock market and cryptocurrency. Instead, you can opt for FDIC- insured banking products with guaranteed returns. Although, these returns are significantly less as compared to other long-term options.
How can you start investing?
Many avid investors choose to diversify their portfolio by investing in different categories of assets according to their tolerance for risk. If you are just starting out with your investment journey then you should start with making simple investments with low risks involved. You can start with mutual funds or ETFs before moving to individual stocks, real estate, etc. It is advisable to gradually start building your portfolio from risk free investments and then move up when you get the hang of how to assess the risks and rewards of different asset classes.
Here is how you can start your investment journey:
- Choose an investment platform after researching various alternatives
- Decide on a mid- or long-term goal and analyze their risks
- Build your portfolio
- Diversify your portfolio with individual stocks, bonds, gold or mutual funds.
Investing is the first step you take towards wealth generation so it is always better if you analyze all your options and learn how to assess their risks and potential profits.