In our last blog post, we covered Stoicism and what it means to me in the context of investing and personal finance. In this post, we will look at investing itself. Many of you who visit this website will be familiar with investing, what it means and what you can expect from it. However, this explanation will be geared toward those of you who are new to the investing world. If you are an experienced investor or you have had some experience in the markets, I would encourage you to read on. I find that a back to basics approach can often give you a fresh perspective.
The Oxford English Dictionary defines investing as to “put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit”.
At its most basic, investing is buying something with the expectation that in the future you will receive more than you paid for it. Simple right? At its core, investing is not a complicated business. Take stocks as an example. Companies need money to grow. In order to get money, they can sell shares in their business, giving the buyer a tiny piece of the company. The money they receive is in turn invested into hiring people, buying machinery or whatever other needs the business has. As the company grows so does its profits, which make the company more valuable and drives the share price higher. The company may also choose to pay a dividend to its shareholders, a small percentage of profits. Between the dividend payments and the increase in share value, an investor who bought stock should receive more than they paid for their initial investment.
I know what you are thinking, that sounds great, where do I sign up? If only it were that easy. It’s not too often that companies sell shares directly to the public to raise funds, chances are if you are to buy a share in a company today it will be through the stock market. This means you are buying the share from someone else, probably a bank or another investor. They will know what they want to receive for the share and this is the price you will have to pay. It may be a good price or it may be a bad price, that will depend on your opinion of the stock and its price relative to what you think it’s worth.
Different Asset Classes
Investing isn’t just concerned with stocks. There are various asset classes, each of which deserves its own future blog post. As I develop the blog, I’ll hyperlink each class below to the corresponding post. Asset classes include;
These five are the main asset classes you will come across as you explore investing, but you are not limited to them. You can also invest in art, wine, whiskey, vintage cars or even watches. Needless to say, these exotic assets will be out of scope for this website (but if someone wants to advise me on them I’ll take it!).
The Most Important Investment You Can Make
So why should you invest? This is an easy one, you should invest if you are interested in making money and protecting your financial future. You shouldn’t invest if you are looking for some excitement if you want excitement you can speculate or try trading (this will also be covered later).
An important thing to mention at this point is that not all investing needs to involve the markets. The most important investments you can make is in yourself. The more educated you can become on any topic the better off you will be. A two-year diploma may seem like a lot of effort, but if it nets you an extra €10,000 in salary won’t it be worth it? To put that into perspective, to make €10,000 over two years assuming an average stock market return of 7%, you would need a portfolio of around €70,000. The point here is to explore your options, investing becomes more viable the more capital you have to invest. The quickest way to a secure financial future is to increase the income you receive today.
Seeing as you are reading this already, that’s a good sign. Investing your time and energy into learning about investing will pay dividends in the future. Don’t be scared of investing like the majority of people are, the more knowledge you have the less daunting it will be.
The Stoic Trader