In 2000, a Nigerian real estate agency sold a plot on Victoria Island for 400,000 NGN; some invested, but the majority passed up the opportunity. Today, the same plot is valued at 15 million naira. Most people think that investments are only for the rich and wealthy—those with money to “waste.”
The truth is that, in addition to serving as legal tender, money can also be used to promote financial growth. Money, like a seed, serves a greater purpose when planted than when consumed.
What does the term “investment” mean?
Investing can be one of the most complicated concepts in personal finance. However, it is also an important component of achieving financial independence and wealth.
An investment is an asset or item purchased to generate income or appreciation. Appreciation is defined as an increase in the value of an asset over time. When a person buys a good as an investment, the intention is not to consume it but rather to use it in the future to generate wealth.
Why should I invest?
Financial investments offer the potential for high returns, diversification to reduce risk, and passive income. They offer opportunities to contribute to company growth, hedge against inflation, and save for long-term objectives such as retirement.
Tax advantages, access to a variety of investment options, and the ability to build financial security make investments an important tool for accumulating wealth and achieving financial goals.
How do I start investing?
Once you understand what you want, you can’t just jump in. You have to first decide what to invest, how to invest, and, most importantly, when to invest. I highly recommend you discuss this with your partner or with the professional guidance of a financial planner before diving in. For the sake of financial education, we highlight each of the key steps to help you get started with investing.
Set your investment goals.
Are you looking for long-term investment opportunities, or do you want your portfolio to generate income? What is your ultimate goal for this money—retirement, a down payment on a house within the next five years, or something else?
Understanding your objectives and timelines will help you determine how much risk you can tolerate and which investment accounts to prioritize.
Select your investment Account
After you have determined your goal(s), you must decide which investment vehicles—also known as investing accounts—to use. Remember that multiple accounts can work together to accomplish a single goal.
A brokerage account is where to begin if you want to take a more hands-on approach to building your portfolio. Brokerage accounts allow you to buy and sell stocks, mutual funds, and exchange-traded funds (ETFs).
A robo-advisor is another type of brokerage account that is best suited to those with specific investing objectives. One of the benefits of using robo-advisors is that they charge lower fees than a human financial advisor and provide automatic rebalancing.
It is important to note that simply opening a brokerage account and depositing funds is not investing. It is a common mistake for new investors to believe that opening an account and depositing funds is sufficient; however, the final step is to make a transaction.
Determine how much money you want to invest.
The amount you put into each account will be determined by your investment goal, which you established in the first step, as well as the amount of time you have until you plan to achieve that goal. This is referred to as the time horizon. There may also be limits on the amount of money you can invest in specific accounts.
What does ”income percentage basis” mean?
The general rule of thumb for retirement goals is to invest 15% of your annual income, but if you began investing later in your career or want to retire early, you may want to consider investing more. Keep in mind that 15% also accounts for any matches you receive from your employer. This means you could contribute 10% of your main income and receive a 5% match from your employer to reach the 15% threshold.
If you live paycheck-to-paycheck, 15% may seem like a ridiculous amount to invest. Do not worry: starting small, even if it is only 1%, is fine. The most important thing is to get started so your money grows over time.
Measure your risk tolerance
“Does it make you nervous to invest when you see the S&P 500 drop over 24% as it has this year?”
Risk tolerance refers to how much risk an investor is willing to take in exchange for a higher return. It is one of the most important factors that will affect which assets you add to your portfolio.
A risk tolerance questionnaire is one way to assess your level of risk tolerance. These are usually a short set of survey questions that will help you determine your risk tolerance based on the answers you provide.
In contrast, risk capacity is defined as the amount of risk that you can afford to take.
Risk capacity takes into account the factors that influence your financial ability to take risks, such as your job status, caregiving responsibilities, and the amount of time you have to achieve your goal. Because these other priorities can be capital intensive, your ability to take risks must fit within them.
Follow an Investment Path
There is no one-size-fits-all investment strategy. The type of investor you want to be is directly related to your risk tolerance and capacity, as certain strategies may necessitate a more aggressive approach. It also depends on your investment objectives and time horizon.
Types of Investments
Stocks/Equities
A share of stock is a piece of ownership in a public or private company. By owning stock, the investor may be entitled to dividend distributions generated from the net profit of the company. As the company becomes more successful and other investors seek to buy that company’s stock, it’s value can also appreciate and be sold for capital gains.
The two primary types of stocks to invest in are common stock and preferred stock. Common stock often includes voting rights and participation eligibility in certain matters. Preferred stocks often have a first claim to dividends and must be paid before common shareholders
Bonds and fixed-income Income Securities
A bond is a type of investment that typically requires an initial investment and then pays a recurring amount over its life. When the bond matures, the investor receives back the capital invested. Bond investments, like debt, enable certain entities to raise funds. Many governments and corporations issue bonds, and investors can contribute capital to earn a return.
Index and Mutual Funds
Index funds, mutual funds, and other types of funds frequently combine specific investments to create a single investment vehicle, rather than selecting each individual company. Instead of researching and selecting each company individually, an investor can buy shares of a single mutual fund that owns small and emerging market companies.
Real Estate
Real estate investments are often broadly defined as investments in physical, tangible spaces that can be utilized. Land can be built on, office buildings can be occupied, warehouses can store inventory, and residential properties can house families. Real estate investments may encompass acquiring sites, developing sites for specific uses, or purchasing ready-to-occupy operating sites.
Commodities
Commodities refer to raw materials such as agriculture, energy, and metals. Investors can choose between physical commodities (such as gold bars) and alternative investment products that represent digital ownership.
Commodities can be considered investments because they are frequently used as inputs in society. Consider oil, gas, and other energy sources. During periods of economic growth, businesses often require more energy to ship more products or manufacture more goods. Furthermore, consumers’ energy consumption may increase as a result of travel. In such light, the price of commodities fluctuates and may yield a profit for an investor.
Cryptocurrency
Cryptocurrency is a blockchain-based currency used to transact or hold digital value. Cryptocurrency companies can issue coins or tokens that may appreciate in value. These tokens can be used to transact with or pay fees to transact using specific networks.
Collectibles
A less traditional method of investing, collecting, or purchasing collectibles is to acquire rare items in anticipation of their increased demand. From sports memorabilia to comic books, these physical items frequently require significant physical preservation, especially since older items typically carry a higher value.
Collectibles are no different from other types of investing, such as equities. Both predict that something will become more popular in the future. For example, a current artist may not be popular due to changes in global trends, styles, and market demand. However, if the general public becomes more interested in their work, their art may become more valuable in the long run.
Return on Investment
The primary method for determining the success of an investment is to calculate the return on investment (ROI).
ROI is measured as:
ROI = (Current Value of Investment – Original Value of Investment) / Original Value of Investment
Investment vs Savings
Saving is the act of accumulating money for future use and carries no risk. whereas investing is the act of leveraging money for a potential future gain, which involves some risk. Despite the fact that both intend to have more capital available in the future, they approach growth very differently. Saving and investing are frequently linked because each may have a specified yield or rate of return. Another notable distinction is the federal insurance coverage on certain accounts. The NDIC provides insurance coverage for bank account balances up to 450 million Naira. This type of financial guarantee is rarely found in investments.
Frequently Asked Questions
What is the difference between an investment and a bet or gamble?
In an investment, you provide funds to an individual or entity to be used to grow a business, launch new projects, or maintain day-to-day revenue generation. While investments can be risky, they typically have a positive expected return. Gambling, on the other hand, is based on chance rather than putting money to work. Gambling is extremely risky, with a negative expected return in most cases (for example, in a casino).
Is investing the same as speculating?
Not quite. An investment is typically a long-term commitment, with the payoff taking several years. Speculation, in contrast, is a pure directional bet on the price of something, often for the short term.
Why Invest When You Can Save Money With Zero Risk?
As previously stated, investing involves putting money to work to increase its value. When you invest in stocks or bonds, you put your money to work for a company and its management. Although there is some risk, it is compensated for with a positive expected return in the form of capital gains, dividends, and interest flows. Cash, on the other hand, will not grow and may eventually lose purchasing power as a result of inflation. Simply put, without investment, businesses would be unable to raise the capital required to stimulate economic growth.
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