If you’ve ever held money in a savings account, you’re already familiar with the feeling of ‘having your money working for you’. Investing is no different (barring some additional financial jargon), working on the same basic principle: ‘put something away now to enjoy more of it later’. While some professional investors, like former MergerTech CEO Nitin Khanna, play active roles in managing multi-million dollar investments–not all forms of investing are the same. So, if you have some savings stashed away beneath the bed and you’re ready to start putting it to work, this article will walk you through what you need to know to get started–along with outlining 4 essential tips for beginner investors.
What is Investing? ● Types of Investments; ● Active and Passive Investors; ● How and Where to Begin Investing; and ● 4 Tips for Beginner Investors (with Nitin Khanna) What is Investing?
Most of us use the term ‘investing’ in a variety of contexts: we invest our time into education, and our support or attention into families and communities. The common theme across all investments is the allocation of resources to an asset (or endeavor) with the expectation that this will bring about some future benefit. When it comes to financial investments, this benefit is an income or profit–for other investments it may be a healthy relationship or an educational degree.
So, what is really happening when you invest in a stock, index fund or bond? How exactly is the money ‘being put to work’? How your money is being used will depend on the type of investment you’re making. We’ll dive into the details of some common investment types below, but simply put: when you invest, you are making some of your capital (in this case, cash) available to a company, government or organization so that they can put it to work on creating new value in the marketplace. When you keep that $1500 tucked away under the bed, you face very little risk of losing it: however, there’s also no way for that capital to grow.
Investing is perhaps the primary vehicle of a successful capitalist society, as it allows for funds which would otherwise be idle (stored in a safe, or tucked under the bed) to be put to work in businesses which can then create more value. Figure 1: S&P 500 Index: Adjusted for inflation) It’s worth noting that while long-term investments on index funds have steadily tracked upwards over the past several decades: there are no guarantees. Some investments are riskier than others, and the expected returns on an individual stock tend to rise with risk (i.e. the riskier the investment, the higher the potential payout).
Active, Passive and Risk Averse Investors Before diving into the investment options on offer, the first thing a broker is likely to ask is: ‘What type of investor are you?’ There are two things they really want to narrow in on:
1) ‘How active do you want to be in managing your investments?’ and
2) ‘How much risk are you willing to take on?’ Being a beginner doesn’t disqualify you from wanting to do your own fundamental and technical asset analyses–but odds are, if financial ratios, market research and scraping quarterly reports isn’t your idea of a pleasant investing experience, then there’s nothing wrong with choosing to be a more passive investor.
Passive investors are inclined to trust the advice of a broker, invest in a more diverse portfolio (or index fund), or invest their money with a passively managed mutual fund. Active investors are looking to ‘beat the market’, so to speak.
They take responsibility for researching companies and stocks they’d like to invest in, and look for arbitrage and short-term opportunities to make a profit on fluctuations in the market.
It’s worth noting that a seasoned investor like Nitin Khanna can take on the role of both active and passive investor–making active investments in promising startups, while mitigating risk with longer-term, low risk investments in the portfolio. The second question will define the level of risk you’re looking to take on as an investor. Are you willing to risk large losses for a big payoff? Or are you investing for retirement–looking to slowly, but consistently, make a return that’s (hopefully) higher than a standard savings account?