Investing 101 : The Hows, The Whys & Everything In Between
As you’re reading this blog, chances are that you’ve had your social feeds blow up with ‘7 day bitcoin billionaire’ and ‘overnight rags to riches’ narratives and you’re probably going to bed asking yourself one of two things. What really is all this jazz and why your fixed deposit isn’t making you the next big thing in the financial realm, despite your financial advisor selling it to you as if it was your one way ticket to financial freedom.
Well, if it was that straight forward, wealth inequality and poverty wouldn’t necessarily be at the forefront of economic issues that needed to be addressed, would it? Maybe this blog isn’t going to put an end to world poverty, but hey, if a handful of you are able to understand the rudiments of investing and take action on it, sounds like a pretty good deal to me :)
Here’s what’s on the menu today, so feel free to skip as and how you please.
• The Where
• The How
1. The Why
Let’s start off with the million dollar question, shall we. Why on earth do I need to be ‘investing’ my money in the first place?
Let me simplify. Take out your favorite chocolate. Go ask your grand mom how much a bar of chocolate would’ve cost back in her day. Rest assured she’s going to quote a fraction of how much you paid for it. Now, you could give her the chocolate as a token of appreciation and let’s get back to business. This is essentially what inflation is. The fall in the value of a currency over time, and consequentially, the increase in price of goods and services. If you paid $100 for a basket of goods last year, and your country’s annual inflation is 5%, you are now going to have to pay $105 for the very same basket of goods. Go ahead and do the math on the effect it has on million and billion dollar institutions, and you’ll see just how important investing is.
If you’re asking yourself why inflation happens in the first place, I’ve got to salute you on sparking your curiosity! Here’s a small reward for you ; a comprehensive macroeconomics e-book for the price of just your email! Click here to find out more. Hope it helps :P
2. The Where
“Alright Shayan, I’ve got ‘the why’ in the bag, but there are so many options for me to invest my money, and it’s so overwhelming!”
I promise you it’s not, or at least it won’t be once you’re done reading this blog.
Asset classes are a different subject altogether, but the basic premise on which it functions is risk and reward, ranging from fixed deposits to hyper volatile crypto currencies. However, many financial experts would argue that fixed deposits are an extremely inefficient asset classes, as it barely covers inflation.
Eg — If your fixed deposit is giving you 5% returns on your capital, and your country’s inflation rate is 7% (which was very prevalent for many countries during covid 19), you eventually end up losing 2% of your real money. On the flip side, if your asset class gave you 12% returns, you’ll be making a gain of 5% in real terms (plus dividends if the chosen asset class is equity, getting there in just a minute)
*real terms — money that has been adjusted for inflation
If you’re just starting off with your investing journey (which is likely why you’re reading this) it is highly advisable to stay away from highly volatile assets such as crypto currency. The joy of making ultra-generous gains will definitely not compensate for the loss of your sleep and sanity, come crash day.
Now, sans any fixed income instruments and a few other advanced platforms, that leaves us with the asset class has stood the test of time and has created enormous wealth for the masses. EQUITY.
Equity investing, in its simplest essence, is placing your money in listed companies in exchange for its shares. Now, before you assume anything, no, the life of an equity investor/trader is nothing like what Wolf of Wall Street depicts. I apologize if Leo DiCaprio had you all hyped up.
What exactly give stock markets the upper hand over its fellow asset classes? There’s a handful of them, but what stands out is the power of compounding, dual source of returns (capital gains & dividends) and the myriad of techniques there are to nailing your investment strategy. Sounds like biz? Let’s take it a step further!
3. The How
We’ve now figured that beating inflation is the primary goal, and that bitcoin is probably not the best asset class to jump right into as a rookie, even though crypto TikTok said otherwise.
“So this equity thing, how exactly do I go about in it?”
Firstly, it’s equity investing, or stock market investing, whatever makes you feel like a million bucks (literally and figuratively ;)) and secondly, there are multiple paths you could tread, but they primarily fall under two main categories. Technical analysis & fundamental analysis. If you’ve seen the ‘stock bros’ that stare at charts on a screen for hours on end, these guys are called traders, who make their money through ‘technical analysis’ i.e; trading. Traders usually hold onto a stock for anywhere between a few seconds to a few days. Gains and/or losses usually stem from market sentiment (the external environment’s perception of the stock(s)). On the other side of the spectrum, we’ve got our investors, that operate on fundamental analysis. Perhaps less cool, yet some would argue that it’s 10 folds more effective. Gains and/or losses for an investor are made over a period ranging from ranging from a couple of weeks to multiple decades on the basis of company performance (intrinsic value).
You can either invest by yourself or through a mutual fund. We’ve explained all the basics, complexities and intricacies in an all in one guide on how to research, speculate, trade and invest in equities in our Beginner’s blueprint to financial freedom.
Feel like Warren Buffett yet? Don’t. Oops.
Okay maybe not just yet. But hopefully the day isn’t too far away.
As much as Einstein considered compound interest the 8th wonder of the world, don’t let the simplicities of the game underwhelm you. Simplicity does not always equate to being easy. Wealth creation through equity investing is simple, but it is not easy. It takes extensive amount of research, patience, but most importantly, ability to drown out the noise.
Nevertheless, Congratulations on taking the first step towards financial freedom, a step that many choose to forego. I genuinely hope this blog was of good use to you, and that you could put it to greater use through action.
I wish you well as you embark on your journey towards financial freedom, and sincerely hope you put your wealth to the best possible use of them all ; to educate and to empower, which hopefully, this blog did too.