Investments for BeginnersAs an online entrepreneur, one thing you learn is that the competition out there is stiff and massive so when you make the first dollar, you deserve one big thumbs up. Now that you've minted some money online, my next question is, what are you going to do with it? Buy some online merchandise, pay your bills, save it in your bank account, donate it to a good cause, invest it or plain burn it. Whichever you choose, its still the right choice after all its your money. However, indulge me a little bit and let me show you a different way. I suggest you invest it, why? Because if you invest it, you can still do all the above with your money and some, if not more, of it will still be around to spend when you retire.
First things first, we need to ask and answer each of the following questions:
What is investing?
Who is an investor?
What is an investment?
What do I need to be an investor?
Am I an investor right now?
What should I expect when I invest?
- What is an investment? This is the act of putting money into something, in this case an asset, with the expectation that I will gain something in return.
- Who is an investor? Anyone who takes the risk to investment their money in assets with the sole objective that in the future it will pay back more than what they bought it for. To be an investor you need the financial resources and knowledge on how, where and when to invest.
- What is an asset? An asset is anything that is considered to have economic value. In other words you can exchange it for cash. Simple examples include your car, house, computer, website e.t.c. Cash is also an asset.
- What is a liability? In the context of business a liability is any obligation owed to someone else. Simple example include a loan, unpaid bills etc.
- What is capital? These are the resources required in a business to generate revenue or wealth. Simple examples include money, tools and equipment, premises etc
- What is a share? A share is a single unit of capital. Assuming you have company whose capital is worth $1,000 which in this case is 100% of the capital. A share in that company is worth $1,000/100 = $10.
- Who is a share holder? An individual or legal entity that owns shares in a company. If you own 50% of the company, your shareholding is (50/100 x 1000) x $10 = $500.
- What is a dividend? This is the portion of a company's profits that is paid to the shareholders. Assuming Company A made $100,000 in profits and its is decided that each share holder will receive $1 per share then if you own 50% of the company you will get $50.
- What is interest? This is the compensation paid for using someone else' assets or financial resources. Interest rate is usually calculated in percentage.
The one rule of investing you need to know is that there is always a risk involved, you could make or lose money when investing. However, an investor's job is to mitigate the risk involved and ensure that the chances of making a loss are reduced and those of making money increased.
What are the major investment vehicles available to the layman or beginner investor?
- Stocks or Shares - This is where you buy a part of an existing company, private of public. The return in this class of investment is dividends and capital growth when the stock price goes up or there is a share split or a bonus. These can be purchased at the stock exchange either on the day to day market trading but the best time to enter this market as beginner is when a public company is offering an IPO (Initial Public Offer).
- Collective Investment Funds - In funds, many individual investors pool their money together into a pool fund which the fund manager uses to invest in one or many types of investments like stocks and real estate local and/or off shore on their behalf and also manages the investment portfolio on a day to day basis. The gains made from this portfolio is then divided among the members of the fund depending on how much each has invested into the fund. The biggest benefit in this group is that one gets to invest and benefit from assets, e.g. blue chip counters, that you would not afford if you went into it as an individual.
- Business - Business is the activity of making money or any activity carried out with the main goal being to make a profit. It could be the sale of tangible goods or provision of services. In this case you invest your money in the company that sells the goods and services and in return you get dividends as a shareholder. This is always a good place to start your journey to becoming an investor. There is enough money from the business to start building up an investment portfolio slowly and if you make a mistake and lose money you have a fall back.
- Foreign Exchange or Forex - How would you like to buy currency when is cheap and sell it again when its more expensive. for example if the USD is worth 0.9CAD today, you can buy some and a sell it after a few days or weeks when its worth say 1.1CAD thereby making 0.2CAD per dollar. Suppose you'd invested like a 1,000CAD you'd have made like 100CAD all in one transaction.
Remember, an asset brings income which means the house you live in is not an asset, though your banker might tell you otherwise. However, if you buy a house and rent it out, it becomes an asset. The opposite of asset is liability, so as an investor you should always work towards increasing assets and reducing liabilities. That way your gains increase every day else you'll be losing money if liabilities are going up and assets down.
Are you an Investor, a Business Owner, an Employee or Self Employed? The investor earns income from his investments, business owner from his businesses, employee a salary working for the business owner, self employed from specialized skills or services to the business owner and investor.
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