Understand Basics of Investment: A Beginners Guide 2023

Investment is something you do today and you get the returns in the future (near or distant usually distant future). If you are reading this then you already have an understanding about Investing or you want to learn about basics of Investments. We often hear people saying if you would have invested 10 years back in Apple, or Tesla or follow Warren Buffet’s portfolio then you’d be a millionaire by now. If you are reading this blog because you are new to investment or just want to look at investing from a different point of view then I strongly recommend you to read the full blog.

If you are new to investment then it will look really complex to you. When we start researching about investment, we come across things like buying stocks but a new investor may not even know how to buy a stock or may not know what is a stock? And when you gather that information do you just go out and buy Apple, or Telsa or Airbnb stocks?

I know as someone new to investing, you want to know how all this works? Honestly when I started researching about investing I read some of the words for the first time, like TFSA, Roth IRAs, 401K, RRSP and so on. And every article I used to read or every video I used to watch came with a scary warning that investing is a risky business, do your thorough research before investing yada yada yada. Obviously I wanted to start investing to earn something and not to lose my money; no one wants to lose their money.

I want to share the knowledge I gained from my research and my experience in investing with you. Lets clean our brain and try to forget everything you know about “Investing”, I want you to clean your slate.

Inflation

We all know that money loses it’s value over time because of “Inflation”. I have heard this lot from my Economics teachers, my seniors and my friends & family. Something that was for few cents few years back is now for a dollar, that’s inflation. If you keep $1000 in your cupboard today in year 2023 and take that money out in year 2024, you won’t be able to buy the same stuff that you would be able to buy in 2023.

As a Novice you can think what the shoots, its still the same $1000 what happened? The reason is that the prices of everything would have gone up by some % in since last year. This is called Money losing its Value and that’s how the value of our $1000 has fallen.

Sometimes we may think that our money in a Bank’s savings account is not losing its value, the bitter truth is it is and will still lose value because the banks will never match the interest rates with the Inflation rates. % interest on Savings account is always lower than Inflation% so we will always end up losing our money’s value. Just keep this 1^st point in mind and read the next.

How do I stop my money from losing its value?

To answer this question, let’s assume we found a bank and it has a savings account say SuperValue savings and it offers you 7% interest of any whatever money you put in that savings account and the inflation in our country is also 7%. It means that my $100 will become $107 in one year, only in this hypothetical scenario our money has not lost any of its value.

If we can find any such option that will help us protect the value of our money and that answers our questions. However, our aim not only to stop my money from losing its value but also to increase it’s value. If you have understood this much, then that second part where you want the value of money to increase can happen by Investing.  I hope I have made the first two points clear, as I want to keep a strong foundation first.

I want to stretch our example of “SuperValue” Savings a little more before jumping on to my next point. Although such savings account don’t exist in real world, and if there were any savings account that can match the interest rate with the inflation % then you will be actually making money by compounding the interest and allowing it to grow.

Your $100 at 7% will double itself after 11 years if you keep investing the interest too for 11 years. I will try to cover the concept of reinvesting too. For now just remember the two points the concept of Inflation and How to stop our money from losing its value.

Understand about Investing.

If I want to tell you in simple words then Investing means using your money to make more money. Let’s understand it with an example – say you buy a town house for $200,000 and you rent out your house for say $2,000 per month. Now, you have started getting that $2000 every month so that’s a $24,000 at the end of the year and the value of your house may go up by say $50,000.

So, you made money as a capital gain too, it’s the increase in the value of your house over the period of time. In this example you invested $200,000 and started getting $24,000 per year as rent it also means that before 9^th year you would get back more money that what you invested to buy this house, also as seen in most developed countries the real estate prices become double in 10 years. With that expectation you increased the value of your money many times.

It is just an example and I understand that buying a house can be tedious and it requires a lot of money or maybe a mortgage to begin with and renting can be troublesome too at times.

Now, I want to introduce to you how to invest without having huge amount of money and also without going through hassles of mortgage or renting or whatever we saw in our example. To tackle these problems we invest in Stocks or Shares. Just remember the above three points and we will understand about Shares now.

What do you mean by Shares?

For someone very new to the world of investing (as I was a few years back) then you should read this section, if you know about Shares you can skip and jump to the next point.

Let’s understand what shares are and what it means when people say buy shares or sell shares.

Share means a part in the ownership of a company. When you buy a share of a company, you technically buy a part of the ownership of that company. You become a part owner of that company. Let’s understand it with an example – say I buy a share of Tesla for $195. Tesla earns money when people buy Tesla cars and when people buy a lot of Tesla cars then Tesla see its performance and check how much profit it earns. Elon Musk can then decide to share the profit among all the share holders of Tesla, this profit sharing is called Dividend.

If Tesla decides to pay 2.5% dividend to its share holders then I will get 2.5% of $195 that I bought shares for or I can say I invested in Tesla. However, if sales of Tesla goes down or if for any reason Tesla is not earning profits then it can chose to not distribute any dividend or worse is that the share price can go down from $195 to $180, in that scenario I will lose money on my investment. One thing to understand here is that YES investing by the way of buying and selling shares can be RISKY. If you are with me so far and all the above 4 points are clear then we can move the next point.

Investing in Shares

I introduced about investing in previous point, so we have an idea now that investing in shares means buying a share of a company. From this step onwards you have to be extra careful as buying a share is not like going on Amazon website or app and buying a share that will get delivered at home. You can’t even go to Tesla website and place an order for a share of Tesla.

To buy a share of a company you have to follow the below very simple steps:

(I will write a detailed article on this topic later):

• Open a brokerage account

Ever since brokers are available online, you can easily open a brokerage account online. Most the banks offer this service or you can chose an online broker as per the country you live in. This account is like a bank but instead of money it holds your investments. You can either choose an Online broker or a full-service broker.

Online brokerages are usually cheaper than full-service brokerages and allow you the freedom of buying & selling shares at your own will at your own time. Full-service brokerage usually offers a personalized service and that’s its very strong advantage over online brokerages.

***Cosider reading the Basics of Brokerage accounts

• Fund your brokerage account

Before you can buy shares and keep them in your brokerage account, you need to put money in your brokerage account, like a prepaid card. That’s not a big deal especially in this time of online banking.

• Decide the stock you want to buy

Please research before deciding which stock to buy. We have read above that its risky but if you research properly then you can take a calculated risk. You can buy a share at market value or you can place an order to buy the shares when it hits a particular price. As I am writing this I am having a feeling that I should write a detailed article on how to buy shares, don’t worry I will write it shortly, in this article I am only trying to explain all the steps to our beginners.

• Buy a share

After deciding which share you want to buy, you can buy a share online via your brokerage account.

• Buy an Index Funds

You often hear people say that as someone new to investing it is always better to investing in Index funds than investing in Shares of a company. I agree with that statement too, and that’s where some of my money is invested right now for last few years.

Let’s understand what an Index Fund is. Imagine there is a basket that holds many shares and it matches performance of a stock market index, like S&P 500. When we invest in an index fund we own a little bit of a lot of different companies at once. It is considered to be a lot easier than buying individual shares, a very low-cost way to invest in stock market and build a wealth with time.

I will write a long detail blog on Index funds soon. Meanwhile, let me know if you have any questions or doubts regarding index funds, I will answer all your questions in that blog. I hope I was able to provide some valuable information about Investments.

Thank you reading till the end!!!

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