Investing 101
Stocks. Bonds. Options. Short Selling. Margin calls. We've all heard these words, but sometimes there's just so much mystery surrounding them.
What exactly is investing?
The dictionary definition of investing is to "expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture." When we talk about investing, however, we are mostly referring to the investing of one's own money in things like the stock market, or the bond market. For many people, hearing these words is daunting - many feel like this is a topic they would rather leave to the finance guys at their investment fund. However, it is always good to have a general understanding of how these things work, even if you are not personally taking care of your investments
One of the most fundamental differences we must understand is that between stocks (or shares) and bonds. The simplest explanation is this: when you buy stock from a company, you are buying a small percentage of it - when you buy a bond from a company, you are lending that company money, but you do not own any part of it. Below is a more comprehensive table of the differences between both of these terms.
Differences between stocks and bonds
Stocks
- Represent ownership - essentially, you are buying a small percentage of that company.
- Stocks are usually more volatile - they can rise in value, or go down in value, depending on how the company is doing.
Bonds
- Represent debt (usually long-term) - essentially, you are lending money to that company.
- Are usually less volatile - you are guaranteed your original investment returned, plus interest, over a certain amount of time (unless the company defaults.
Something that you must also consider is your risk tolerance. Based on this, you balance your portfolio with a certain percentage of stocks and a certain percentage of bonds. Remember, stocks are considered riskier than bonds, as they are more volatile.
A great resource for personal finance and investing guidance is Platinum Wealth, I created that platform to help South Africans invest and learn more about finances for free.
Before you even start to research the different products and underlying funds, you need to ask yourself a few questions.
- What is your goal and when would you need the money again?
- Are you a taxpayer and could benefit from choosing a tax-free product?
- How much price volatility are you comfortable with?
With these factors in mind, you can now start weighing up your options and plotting your investment journey.
A good thread to begin with is How to start Investing, it covers the basics to get your started.
Disclaimer
This information is purely educational - if you are unsure, seek help from a professional.
Investments in the stock market may fall as well as rise and are not appropriate for investing for the short term. You may get back less than you invested. All investment carries risk and it is important you fully understand these risks and are willing to accept them. Past performance should not be seen as an indicator for future performance.
