Ultimate-Guide-to-Investments-for-Beginners

The
ULTIMATE
GUIDE TO
INVESTING
FOR BEGINNERS
HARSH & ADITYA GOELA
WWW.GOELASF.IN

Table of Contents
01
Introduction
Page 3
02
The power of compound returns
Page 5
03
Timing the markets: What investment returns can you expect
Page 6
04
How much money should beginners invest?
Page 7
05
When should you start investing?
Page 10
06 Types of assets you can invest in Page 11
07
Conclusion
Page 17
08
Resources
Page 18
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Introduction
We all want to get the most of our
money, whether it's upgrading our
lifestyles, splurging on a holiday or a
new car, or planning for retirement. As
a beginner, though, figuring out where
to start with investing can be a
challenge. There are so many options,
and when you look at the numbers
over the long term it can quickly get
overwhelming.
The truth is, though, that knowing how
to use your money today to earn more
for the future is a great way to ensure
a financially secure future. Just letting
your capital sit idle in your bank
account won't help you save for the
long term. This is why it's so important
to consider investing as early as
possible.
What is investing?
Investing is simply putting your money
into an asset with the goal of the asset
generating income, or appreciating in
value.
A share is simply a small piece of a
company. If the company pays
dividends to shareholders, this is a
form of investment income. You can
also choose to sell your shares -
hopefully after the company's share
price has risen, in which case you'll
make a profit.
“The reason for doing this is simply to
make your money work harder for you
than it would if you just held it in cash”
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Why should you invest money?
The topic of investing for beginners will
typically begin with this question - why
invest at all? The simple answer is to
build your wealth.
Most of us have noticed that prices
don't remain the same - from the
person who talks about milk costing
Rs.10 in their day, so simply noticing
that eating out or travelling seem to
cost more than they did five or 10
years ago. This is inflation - the rate at
which the price for goods and services
increase over time.
The challenge with this is that it means
the value of the cash in your bank
account decreases over time.
The basket of goods and services you
could buy with Rs.1,000 would have
been much larger 50 years ago than it
is today. Similarly, with the prices of
goods and services continuing to
increase, Rs.1,000 in your wallet today
will buy a smaller basked in another 50
years time.
The benefit of investing is that you can
earn a higher return than the rate of
inflation, meaning your money
increases at the same rate (or, ideally,
at a higher rate) as the cost of living.
Unfortunately, most bank accounts
aren't offering very high interest rates
today, so when you're investing your
money, you'd want to put it in
companies that offer the potential to
earn high rates of return, in order to
grow your wealth over time.
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The Power of Compounding Returns
So how do investments work in
practice, when it comes to making you
money?
Simply, each investment has a rate of
return, or the rate at which the
investment will increase in value over
time.
A savings account might pay 6%
interest per year, for instance. This
means that if you put Rs.10,000 into
that account, in one year you would
earn a return of Rs.600, bringing your
total investment up to Rs.10,600.
If you then did nothing else, you would
earn another 6% the next year.
However, because your starting
balance for the second year is
Rs.10,600, the 6% interest would be
valued at Rs.636. This would bring
your total account balance up to
Rs.11,236.
Every year you would continue to earn
interest on your growing account
balance.
If you then left your money in the
investment for another year, you
would earn another 17%. Because
your investment is now Rs.11,700,
17% is Rs.1,989. This brings the
grand total to Rs.13,689.
If you invest Rs.30,000 in stock
markets (17% return) at the age of 20
and withdraw the amount when you
retire (at 60) the total amount will
become Rs.1,60,16,061. We’re not
making it up, this is pure math.
Now imagine, what if you increase the
initial investment amount ?
The stock market, on the other hand,
might be growing by 17% a year. This
means that if you invested Rs.10,000
into the stock market, in one year your
investment would be valued at
Rs.11,700.
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Timing the markets: What investment
returns can you expect
One of the biggest challenges for
beginners learning to invest is learning
what to expect. There are so many
media headlines, not to mention
success and horror stories, telling us
about a market or investment that
spiked or crashed overnight.
This can lead a lot of new investors to
believe that they need to time the
market - to buy and sell at the exact
right time - in order to have success in
investing.
The truth is that markets move in
cycles. Over time, productivity grows -
technology gets better, companies
grow more efficient, and people build
on the innovations that have been
made in the past. This leads to
companies getting better and better
over time.
As an investor, it's important to accept
that markets will constantly go up and
down. However, once you accept this,
you can stop worrying about trying to
time your investments perfectly, and
can instead focus on buying and
holding for the long term.
In general, markets go up over the
long term, meaning long-term gains
will survive any short-term ups and
downs.
“Time in investments is more
important than timing the
investments”
Saying that you can earn a better
return with timing, but this only comes
with a lot of knowledge.
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How much money should
beginners invest?
When considering investing for
beginners, how much money should
you invest?
This depends on three main factors:
1. Your financial goals
2. How much you can afford to invest
3. Your risk tolerance
What are your investment
goals?
First, ask yourself: What are your
financial goals? Why are you
investing? What would you need
money for in the future?
Some common goals include:
• Having the money to buy a house
or a car
• Funding your child's university
education
• Growing a business
• Having money/generating an
income for retirement
With this in mind, it's important to:
1. Clarify your financial goals
(including the amount of money it
will take to achieve those goals)
2. Choose a time frame for achieving
those
Once you have a goal and a
timeframe, then you can calculate how
much you need to invest per month or
per year (taking into consideration the
expected rate of return) in order to
have enough money set aside to
achieve your goal.
Longer term goals are easier to reach,
due to the power of compounding.
The power of compounding makes a
few percentage points appear
massive after long periods of time. So,
both extended timelines and higher
rates of return could potentially give
you the same results. This is what
makes investment interesting and
suitable for different goals.
How much can you afford to
invest?
A good starting point is 10% of your
income. Start tracking your current
spending to see what you can cut. Do
you have subscriptions and
memberships that you never use? Are
you eating out a lot, rather than
making meals at home? Do you have
a habit of buying things you don't
need, rather than using what you
already have?
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Identifying these habits and cutting
back on them can help free up the
funds you need to start reaching your
investment goals.
How much investment risk are
you willing to accept?
The next aspect to consider is your
risk tolerance, or your ability to take
risk. This usually depends on factors
such as your current income, savings,
expenses, financial obligations (like
paying off a mortgage), whether you
have financial dependents, and
whether you have appropriate life and
health insurance cover.
Someone who is unmarried working
full time would likely have a higher risk
tolerance. Because they have lower
expenses, they have more
discretionary income that can be put
towards investments. Because they
don't have financial dependents, if
there is a short-term blip in the market
that costs them money, they can
simply ride it out.
By contrast, someone who is the sole
income earner for their family has a
range of financial obligations that
would likely mean their risk tolerance
is a lot lower.
For them, it is a much bigger issue if
something goes wrong, because not
only is there no extra income to fall
back on, but there might be several
people depending on their income. For
this reason, they would likely invest a
lower amount in order to always have
some emergency cash on hand.
Investment time frames can also affect
risk tolerance. As we discussed
earlier, while the financial markets go
up over time, there are shorter term
shrinkages and crashes. If you have
some years to go before you need the
funds, you could expose your portfolio
to higher-risk, higher-reward
investment options. Younger
generations can afford to take more
risks.
As you grow older, your strategy might
turn into a lower-risk, lower-return
profile.
Simply, someone who is investing with
a 30-year time span can wait those
out, and enjoy the cumulative gains
they make over time. Someone who is
investing with a 5-year goal, however,
would probably want to choose a
'safer' investment - one that isn't likely
to have the same growth in value, but
which also has a steadier upward
trend in the short term, rather than
risking a potential downturn.
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When should you start investing?
There's an old Chinese proverb that says:
"The best time to plant a tree was 20 years ago. The second best time is
now.“
When it comes to investing for beginners, because of the power of
cumulative returns it is always best to start investing as soon as possible.
Ideally, that would have been 20 years ago - then you would have 20 years
of cumulative returns building up.
However, if you haven't started yet, there's no need to panic - the second
best time is today.
Simply: the sooner you start, the sooner you can start
benefiting from compound returns, and the longer period
you allow for those returns to accumulate.
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Types of assets you can invest in?
Investors put their money into a range
of assets to see it grow.
These include 'productive assets',
which are investments that can pay
you an income (for example, a rental
property will pay you the rent as
income, while shares may
pay dividends), and 'non-productive
assets', which don't generate income.
Instead, investors choose these
because they believe their value will
increase over time, and they can then
sell them at a profit.
Both types of assets have value in
building a portfolio. In the coming
sections, we'll outline some of today's
most popular asset classes.
Investment in stocks of a
company
A stock represents ownership of a
piece, or a share, of a publicly listed
company. Because you hold equity in
the company, stocks are sometimes
referred to as 'equities'.
Companies issue stocks and shares
as a way of raising funding for
planned business activities. When you
purchase a share, you then become
one of the owners of that company,
which means you have a claim on the
company's earnings and assets.
The value of stocks is attached to the
performance of the company.
Generally, if the business is
performing well, the share price will
increase. If a company is performing
poorly, the share price will decrease.
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There are two ways of potentially
earning from stocks. If you purchase
shares when prices are low and sell
when prices have risen, you would
make a profit. This is known as capital
gain. For this, investors attempt to
identify fast-growing companies.
The other way to earn is via dividend
payouts. When you purchase shares
of a company, you're entitled to a
share in the profits generated by that
company. This is known as a dividend,
which can provide a regular stream of
income for investors. The most
popularly traded shares belong to
dominant leaders within their
respective industries. Some of these
companies include:
• Reliance Industries
• Tata Consultancy Services
• HDFC Bank
• ITC
• Hindustan Unilever
One of the challenges for beginner
investors is choosing exactly which
stocks will do well.
If you want to know more about
stock investments/trading, then
watch our free course on basics of
stock markets:
https://www.youtube.com/watch?v=
qdV7Q1ElI8Y
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Investment in bonds
So, what are bonds? Similar to shares,
companies, governments, and their
agencies issue bonds to raise capital.
However, there are a few differences
between bonds and shares:
Par value: This is the face value of a
bond, and it is a fixed rate. It may be
different to the market price of the
bond, which can be higher or lower
than the par value based on factors
like interest rates and the bond's credit
status.
Interest rate: Bonds have an interest
rate, which are paid to the holder of
the bond.
Maturity date: This is the date at which
the bond becomes due, meaning the
initial investment gets paid back to the
investor.
The bond is bought at par value from
the issuer; and the issuer periodically
pays interest to those who invest in
these. On the maturity date, the bond
returns to the issuer and the issuer
needs to pay the par value back to the
investor.
The main advantage for investors is
that bonds offer fixed-income
payments (the interest payments).
Bonds are used by investors for
portfolio diversification, and to reduce
and offset risk. Just like stocks, bonds
are highly liquid.
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Investment in Real Estate
One of the most popular types of
investment is real estate. In fact, for
many people the bulk of their net worth
is in real estate - typically their family
home.
Real estate is a popular investment
because, unlike stocks, which can be
difficult to conceptualize, you know
exactly what you're getting for your
money - a piece of land, a house or an
apartment.
As an investment, real estate can be
purchased to generate income via
rent, or to sell for a profit.
Nowadays property prices have gotten
so high in many areas that real estate
is quite a difficult market to break into.
A way of getting around this is by
investing in real estate investment
trusts, or REITs, which allow you to
invest in real estate in a way that's
similar to investing in shares.
Unfortunately there is no active REIT
market in India right now. But soon
there will be
A REIT is a company that invests in
real estate and manages a portfolio of
properties. Investors can then buy
shares in the REIT, and the REIT will
pay out income to the shareholders.
Unfortunately there is no active REIT
market in India right now. But soon
there will be
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Investment in Commodities
Commodities are raw materials. These
could be: agricultural produce, like
grains, corn and cotton; metals like
gold, silver, copper and zinc; or energy
commodities, such as crude oil,
natural gas and propane.
They are traded on separate
exchanges namely MCX and NCDEX.
The most commonly traded
commodities are:
1. Gold
2. Silver
3. WTI Crude Oil
4. Natural Gas
Commodities are also used as inflation
protection. Inflation causes the
currency to depreciate, resulting in an
erosion of the real value of financial
assets, such as stocks and bonds. On
the other hand, inflation causes a rise
in commodity prices. Some
commodities, such as gold and silver,
are considered a safe-haven
investment.
Geopolitical uncertainties, natural
disasters, and economic crises have a
negative impact on most financial
assets. During such times, investors
flock towards commodities like gold
and silver, resulting in a rise in their
prices.
Commodities are a good asset class
for portfolio diversification. This is
because returns on commodities
typically have a low to negative
correlation with the returns of other
major asset classes. For instance,
when equities and bonds decline in
value, the price of commodities rise.
Factors affecting the stock and bond
markets may not have any impact on
commodities. Therefore, a portfolio
that includes commodities would
typically have fewer volatile returns.
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Conclusion
Investing is absolutely essential to be rich. This is because this will make
your money sweat for you. As a young beginner the best option for you is
always stock markets.
Here you can invest in very small amounts with the best historical rate of
return. With the help of compounding returns you will see yourself not
having any financial problems in future.
But right now it’s extremely important for you start off right
now!
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Resource
Learn the ABC’s of Investing and
Create Real Wealth In Stock
Markets
CLICK HERE GET INSTANT ACCESS
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