The explanations of what “investing money” means can be many, more or less technical, more or less detailed. But the definition we like the most is only one.
To invest means let your money work for you, in your place.
Beyond philosophy and clichés, we all know money is an essential part of every man’s or woman’s life. We need money and money is at the basis of a myriad of key activities that pertain our life.
The first big distinction we have to do is between “having money” and “using money“. Putting our money, as someone says, under the mattress, will turn us into money possessors. But being possessed is not the purpose for which money exists. Money is there to be utilized.
You can use it to do your shopping, to buy goods, the smart phone, the automobile and in general everything that passes through your head. Also having a small untouchable amount for the dark times is not a bad idea. On the other side, you can use your money to make other money. And this is precisely what is meant for “investing”.
One of the main benefit of investing money is that moneys works on its own, independently, there’s no need for your sweat or your continue initiative. Of course, this doesn’t mean you should forget about it and don’t ever think or control it.
You’ll have to tell your money where it should stay and how it should behave, and to do that you’ll have to be aware of certain technical factors, and in general the more things you’ll know the better. Then, money will do the rest.
The two ways for investing money
We can basically distinguish 2 major investment categories.
The first: to buy a good, and then wait for this to raise in value over time, so to be able to resell at a higher value and cash the profit.
This is the method that probably everyone knows. The most well known in this context is the purchase of a property. We all have heard or maybe even said “I asked for a home loan, it’s an investment for the future”. A person buys a property in the hope of reselling it in the future when prices, it’s assumed, will be increased.
Another example of this type of investment is the purchase of works of art. In this case, rather than hoping for a value increase based on time, the investor hopes for an increase of the quotation and popularity of that specific artist or type of work.
Finally, one of the most important examples of this type of investment is for sure the purchase of company’s shares. By purchasing a share, the investor becomes owner of a piece of that company, and he hopes the value of that company will rise, so he can then sell that piece of the company to a new owner, or another shareholders, at a higher value, and cash the profit.
This is the branch we are interested the most, and it’s definitely one that has grown and diversified the most over all in the past few decades.
Now we can even buy a financial instrument and earn money if its value decreases. It might seems crazy, but actually is not. We will discuss this concepts in the next course dedicated to the Forex market.
The second: to lend money for a certain period of time and then get them back with the addiction of an interest.
Let’s think about the famous American bond, or German bund, or Italian bot, of which we have heard so much in the last years. By buying a bond I am lending my money to that country for an amount equivalent to the value of that bond at that time, and the country is committed to give the money back to me on a specific date, with the addition of a pre-determined interest, with no possibilities of escaping from this payment, penalty the declaration of bankruptcy.
There are many types of bond, not only for country, but also for companies. By buying that bonds, you lend money to the company that issued them. The company will reward us after a certain period paying us an interest in the form of coupons.
Ok, now you know the two major ways in which you can invest your money and make sure that it’s your own money to bring some more money in your pocket. There are a lot of possibilities, all different and each with its own strengths and weaknesses.
The choice will be up to you.
A very important difference
The important thing, after realizing what an investment is and how you can invest your money, is definitely to understand and have clear what an investment IS NOT.
Investing is not gambling. I don’t choose a company the same way I choose a number of the casino roulette. A lot of people still make this associations. It’s true that investing means to bet, but a bet is not based on luck alone. You can also bet on the stock market pulling a dime, but do it in a professional manner is another thing.
The art of the investing money is based on reasonable expectations, which derive from statistics, derived in their turn from professional studies done on that sector. An investment is based on these components: study, experience and facts.
Obviously, risk still exists, and it’s part of the game. It does not and will never exist the absolute certainty of a profit for each investment transaction you’ll make on the market. There are statistics data and there are systems that work via them and that can produce a gain in the best way possible.
As investor you have to learn to recognize and foster those investment systems that statistically, in the long run, are profitable.
But above all, you will always have to deal with risk.
First of all you needs to accept it, because it exist and it will be your ubiquitous travel companion.
Second, you must learn to distinguish it, because when you will understand how to handle it, that will be the moment in which you will pass from “gambler” to “real investor”.