What Are Investments and How to Start Investing from Scratch?

Investments involve putting capital into business or other activities to earn a profit. There are two significant reasons to start investing:

• Money saved at home depreciates annually due to inflation.
• It’s advisable to grow your free money to supplement your salary and future pension.

Financial experts recommend saving at least 10% of every paycheck or other income. These savings should then be used for investment. You could invest monthly or save up for a more significant investment.

What Are the Different Types of Investments?

Investments are divided into categories based on different characteristics, two of which are crucial for beginner private investors:

1. By Investment Duration:

• Short-term investments – capital is invested for up to 12 months, such as placing money in an annual deposit.
• Long-term investments – capital is invested for over one year, like buying stocks of profitable companies expected to develop economically.

2. By Investment Objects:

• Real investments – capital investments into tangible and intangible assets. Investments in tangible assets are aimed at reproducing main funds (buildings, equipment, transport, etc.) and replenishing working capital, while intangible investments might include acquiring licenses, patents, software, etc.
• Financial investments – these are investments in financial instruments, both traditional (securities and derivatives) and new (cryptocurrency).

Investments of all kinds are future-oriented and thus associated with uncertainties in currency, stock, and other markets. They are risky. There is a chance that the investment project might not achieve its goals, leading to potential losses. All investment risks must be identified and assessed to avoid such scenarios.

Investment Features for Beginners – Watch This Video

Check out this YouTube video on our portal about what investments are, how they differ from savings, and what is the difference between active and passive investing.

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What Are the Features of Real and Financial Investments?

Real investment objects rarely depreciate. For example, investing a certain amount of money in antiques or real estate can continuously increase its value, despite inflation. Real investments offer a high level of profitability and allow the investor to earn much more than if the money were deposited in a bank account.

However, some real investment objects may have low liquidity. Liquidity measures how quickly an object can be sold without significantly lowering its market value. For instance, an apartment in a new building in a prestigious area might have high liquidity, making it a profitable investment, especially if purchased during the construction phase.

Financial investments are more common due to their features:

• High profitability.
• High volatility – this refers to the intensity of price fluctuations over a certain period. The higher the volatility, the more opportunities there are to profit from price differences.
• Portfolio investment form. An investor who buys shares does not control the company directly but earns profits through dividends.
• Accessible to all categories of investors. Shares, bonds, cryptocurrencies, and other financial instruments can be purchased with small amounts of money, while buying property, which may be resold or rented out, requires significant funds.

Financial investing is regulated by law, but this does not guarantee that investors will achieve the planned profit or avoid losses. It’s crucial to calculate all risks.

How to Start Investing from Scratch?

To manage your income effectively, you need to develop financial literacy, which involves three primary skills: earning, saving, and growing your money.

You should learn how to save earned money properly:

1. Calculate your monthly expenses on non-essential needs, such as utilities, food, household expenses, recreation, and medical costs.
2. Calculate the minimum size of an emergency fund – the amount that would cover all essential expenses if you lose your job until you find a new one. Realistically assess how many months it might take to find a new income source and multiply this by your monthly expenses.
3. Try to save a certain amount of money from each income. Subtract your monthly non-essential expenses from your salary to calculate this amount.
4. Set aside the necessary amount for your emergency fund, and any remaining money becomes your free capital.

If you have free capital, learn how to multiply it. Choose profitable instruments and invest in them. For instance, if you opt for cryptocurrency investments, focus on well-established coins. Forbes experts suggest not including more than 10% of new, lesser-known cryptocurrencies in your investment portfolio due to their high potential profit and high risk of loss.

Investing for Beginners: 10 Tips

This comprehensive guide to investing for beginners equips you with essential knowledge and practical tips to navigate the investment process effectively. Investing is a long-term endeavour that requires patience, discipline, and a sound understanding of your risk tolerance and financial goals.

1. Plan Your Course. Before investing a dime, clearly define your financial goals. Are you saving for retirement (long-term), a down payment (medium-term), or a vacation (short-term)? Your investments should align with your goals’ timeframes. Long-term goals can handle higher risk, while short-term goals need more stability.
2. Start Early & Be Consistent. Time is your greatest advantage. Begin investing early, even with small amounts, and be consistent with regular contributions. Setting up automatic deposits helps ensure this.
3. Know Your Risk Tolerance. Everybody has a unique level of risk he is ready to take. Rate your risk tolerance — how much fluctuation can you manage in your individual stock’s value? Match your risk tolerance by selecting investments that are suitable for your tolerance range. A younger investor will be more eager to take risks, whereas somebody who is close to retirement may prefer to focus on stability.
4. Diversify, and Invest in Several Assets. Spread your money in different categories such as equities, bonds, and real estate. This helps to offset the whole risk if one asset class goes down. On researching asset allocation models or consulting a financial advisor to gain information on how to diversify based on your goals and risk profile.
5. Investing for the Long run. The stock market tends to fluctuate, but if we keep a longer-term perspective, it shows upward movements. Panic buying shouldn’t be done at low market periods. Pay attention to your long-term goals and do not get under the influence of short-term market mood changes.
6. Mind the Fees. The fees that investment providers charge may diminish your profit. Research low-cost mutual funds or ETFs with low expense ratios to keep the total cost as low as possible. Consider the expense ratio before making an investment decision. Lower expense ratios imply that your money will be doing more for you.
7. Educate Yourself Continuously. The deeper you understand investing, the more sound your decisions will be. Read books, articles, and podcasts to increase your understanding of financial matters. Many resources, such as websites and libraries, can be accessed at no cost. Continue to educate yourself and increase your financial literacy level.
8. Avoid Get-Rich-Quick Schemes. Investing is a long-term goal, not a short-term burst. Keep on the alert for offers of high returns with low risk. Emphasize the need for accumulating wealth gradually throughout the time. Keep away from anything that sounds unreal one.
9. Rebalance Regularly. Because market conditions constantly fluctuate, your asset allocation can easily become unbalanced. Re-balance periodically so that you can keep your desired risk level. Review your portfolio annually, or more often if necessary, to adjust your asset allocation as needed.
10. Seek Help When Needed. Financial advisors can offer personalized advice based on your unique financial situation and goals. Consider consulting a financial advisor, especially if you’re a beginner or have complex financial needs.

Conclusion

Investments allow you to multiply free money and increase your wealth. Funds are placed in investment instruments to earn a profit. Investments are divided into real and financial types. Real investments mean putting money into tangible and intangible assets, while financial investing involves financial assets.

To start investing from scratch, you need free capital. To have this, you must master financial literacy and learn how to save a portion of your income correctly. Depending on the amount of free money and personal preferences, choose profitable financial instruments or tangible objects and regularly make investments.

Common Questions About Investments