Investments — what is it and why are they needed
Investing is the process of investing financial resources somewhere in order to generate long-term income. By investing your money, you make it work for you, making a profit. Accordingly, those who invest their money in something for the purpose of generating income are called investors.
You can invest in stocks, bonds, securities, real estate, gold, jewelry, and even wine (we wrote about this earlier) – anything that, in the investor’s opinion, will be able to generate income.
Why do you need to invest money and why do you need investors? The answer in this case is quite simple – to get even more money. And why have a lot of money? Additional funds are primarily necessary for a person for unforeseen situations, everyone should have an “airbag” that can keep them afloat at the right time.
This amount of money should be stored in a highly liquid financial instrument so that it can be withdrawn at any time, and so that it consistently generates a good income. Most investors choose bank deposits for this purpose.
Secondly, if you plan to live comfortably in the future, you will not be able to do without investing. And although investing is a long process, however, it will allow you to become financially independent in the future, live in peace, receiving passive income that is many times higher than your salary. This will give you the opportunity to do what you love, without wasting time on the job you don’t like. Isn’t that what every one of us dreams about?
Why do you need investments and where to invest your money?
Modern investors have many opportunities to invest, but not all of them will be profitable. The most popular and profitable instruments:
- currency.Euros and dollars can be sold profitably when the exchange rate changes, however, in the long run, this instrument can be quite risky due to inflation;
- real estate is characterized by a stable value, low liquidity, but in this case it is also necessary to take into account taxes, price increases for housing and communal services.This tool can be profitable if you invest in capital construction and then resell an apartment, rent out a living space for daily rent, organize a hostel, etc.;
- gold, platinum, and silver are perfectly suitable for storing your own capital. These metals are liquid in any country, their value does not depend on the situation in the country and is stable.Precious metals will be an excellent accumulation option, however, as an investment they are not quite profitable enough.We will tell you more about investing in silverin this article;
- securities are a great option for beginners if you want to understand what it means to invest money.To buy, you don’t need a huge start-up capital, as in the case of real estate, for example.For passive income, choose shares of liquid companies with minimal bankruptcy risks;
- a business is the riskiest investment, but it is also the most profitable.
In addition, many people practice investing money for the purpose of generating income in raw material assets – agricultural, energy, metal, livestock raw materials.
What does it mean to invest?
The process of investing your money to generate income is characterized by certain investment parameters:
- possible risks.
Before investing your money in something, you need to decide on the purpose of investing, understand what exactly you need investments for? To do this, it will be useful to answer the question: how much money do you need? This will be your investment goal.
Your goal should be specific, that is, you need to know exactly the amount that you are aiming for ideally. But at the same time, your goal should be as realistic as possible, soberly assess your capabilities. It is advisable to define the maximum and minimum goals.
The investment period is the time period in which you plan to achieve your goals. This period directly depends on the profitability of your investments and the amount of funds invested. The higher these parameters are, the faster you can achieve your goals.
Investment volume refers to the total amount of money that you invest to generate income. Usually, when the amount increases, new investment options appear. As a rule, novice investors do not have a lot of money, so stability will be especially important for them at the first stages. For example, on payday, save a certain amount of money for investments.
If long-term investments are planned, it is the regularity that plays a crucial role, and not the size of the initial amount.
Profitability and risks
These two concepts are inextricably linked. The higher the return on investment, the greater the probability of risks. And vice versa. If, for example, you need investments in the economy of developing countries, you can get a good result, the yield can be significantly higher than bank deposits. However, the risks in this case are also high. The economy of developing countries is characterized by instability, there is a high probability of financial problems, so you can lose a huge part of your capital on such investments.
In addition, it is necessary to understand that different financial instruments have different returns at certain time intervals. Therefore, to calculate the return on certain investments, it is necessary to use the annual indicator as a percentage. To do this, you can divide the profit received for a certain period of time as a percentage by this period.
It is better to manage risks even at the stage of filling your portfolio. It is not possible to completely protect yourself from risks, however, some rules will help you protect your money:
- invest in assets as evenly as possible, invest in different industries;
- do not buy shares with the last money, you should always have savings for emergencies.;
- carefully study the investment tools, invest money only in those projects that have positive reviews from experienced investors;
- do not cooperate with someone who promises a big profit;
- do not invest on emotions, act thoughtfully and reasonably;
- be sure to set your limit for the maximum possible losses.
Now you understand what investments are and how they work. For effective investment, the main rule is to choose high-quality assets. Do not give in to excitement and do not invest in risky projects, even if the profit promises to be maximum.
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