Things you need to understand about the basics of investing

If you have a financial goal, saving and investing must be one of the ways to reach that goal. Learning to invest is not that complicated if you understand the basics of investing first.

At the most basic level, everyone knows to save some money and put that into a savings account. In this case, you have invested in a product that pays you a monthly sum of interest. This is a very safe method to make your money grow but is not the one that provides the highest return on your money.

The next step is a bit more sophisticated. When you progress from savings to investing, you are looking for an asset to put your money into that can generate a better rate of return than a savings account.

Historical results have shown that returns from equities have exceeded that of a normal bank deposit over the medium to long term. With the low interest rates from banks in recent years, it makes sense to put your money into some higher return investments.

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Defining your financial goal

Keeping your financial goal in mind, think about what you are investing for? Is it to buy a new house or that long term plan of travelling the world? Is there a timeframe when you want this to happen?

In order to find the right asset to invest in, you will need to pick the right type of investment that will give you the return you need, in the timeframe that you require at a suitable risk level.

Your investment options

You can either invest in shares directly by buying the selected companies through a stock broker or buy into funds which hold a selection of shares in particular markets or sectors.

  • Invest in stocks – Investing in stocks needs a higher level of education and understanding. It is best to read up on investing before you embark on this route. By understanding the stock market and how it works will help you learn to invest safely and profitably. The risk of losing money on investing in shares is higher than if you had professional help in creating an investment portfolio. Of course, if you learn to pick stocks, your investment could yield a much higher return that that of a fund.

If you are just getting started, pick the larger blue chip companies

  • Invest in funds – A less risky method is to rely on the expertise of fund managers. There are several different types of funds. There are index or tracker funds which are invested in a basket of equities that emulate the performance of an index. These are not actively managed by a fund manager and usually have lower costs.

An actively managed fund is usually a fund which has stocks that have been expertly selected by fund managers who have usually made extensive analysis on the company and the underlying market. These funds have higher costs and these need to be taken into account when you are considering investing.

  • Fund of funds or multimanager funds – If you don’t want to pick a fund yourself, you can buy into one of these multi manager funds who invest in a selection of funds that they select.
  • ETF – Exchange traded funds are a low cost way to buy into a stock market index or region.

When you start investing, you need to understand the risks. Stock markets are volatile and it is not easy to time the market for the best time to buy or sell. Be aware of the costs of transactions when you buy into a fund or some shares.

One thing to keep in mind is that investments are meant to be held for the medium to long term. If you keep buying and selling your investments, the costs of transaction incurred can really reduce the profit that you make.

Once you have picked your investment vehicle, review it every six months to ensure that the performance is in line with your expectation. Especially if there has been major economic news that affects your holdings.

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