Investing: A Ploy to Lose Money or a Plan to Gain Wealth?
What is investing? Is it a get rich quick scheme? Is it a rigged game for daring idiots that ends in losing money?
Well, investing can be interpreted in both those ways. But, in my eyes, I think that investing is a strategic way to grow your wealth — that is, if you play your cards right.
You probably have heard of investing already. From the controversy with Robinhood and GameStop in early 2021, to the ongoing craze over cryptocurrencies, investing seems to be becoming increasingly relevant and popular among the general population.
But what is investing, and how can you use it to start making a profit?
To understand what financial investing is, you must first understand what investment is in the most basic sense of the word.
Investing is the commitment of your resources into something with the goal of gaining something positive.
All it takes is one retrospective look at your own life to realize that we are always investing. You might have invested your time in reading a book last night to achieve your goal of reading twenty books by the end of the year. Or, you might have invested your attention into review videos in the weeks leading up to your final exams.
In the same sense, a financial investment is the commitment of your financial resources — your money — with the expectation that that money will grow and you will make a profit. The “thing” you invest your money in is called an asset, and they can be bought or sold in a market, just like a supermarket, Amazon, or any other market you might go to.
There are many different types of assets that you can invest in, each paired with their own specific markets and investing techniques. The main assets that can be invested in are stocks, bonds, funds, investment trusts, alternative investments, options and derivatives, and commodities (don’t worry if you don’t know what some of these are yet, I will explain each of them in-depth in future articles).
But how do you know what asset you should invest in? This is a choice only you can make and it boils down to your own risk tolerance and desired return (profit). Each of the assets listed above have different risks and returns, and the one that matches up with your own goals should be the one you invest in.
You might be wondering what risk is in the context of investing and why it matters. Well, the disappointing truth is that investing does not promise profit. In fact, a high percentage of those investing lose money when investing. This is the risk in investing — not only failing to make profit, but actually having a negative return. Your risk tolerance is your willingness to invest in a particular asset in regards to its potential to grow your wealth. For example, assets like commodities and some bonds are risky because of their fluctuations in value whereas assets like stocks and some funds are relatively low risk.
Why not just invest in the lowest-risk assets, you ask? The catch is that there is a general direct correlation between risk and reward — the higher the risk of an investment, the higher the reward, and the lower the risk, the lower the reward. See! Not such a no-brainer now is it?
Everyone wants to maximize their returns but people’s willingness to risk their money to achieve their desired returns — their risk tolerance — is what varies. Thus, the assets that you choose to invest in is a decision you must make after learning more about the riskiness and possible returns that each has to offer, which is what I hope to teach you with this series.
