Are you about to start in the world of investments, but don’t know where to begin? In this article, we will explain in a simple way the basic investment concepts you should know to understand how to start with your financial strategy, and help you to improve your finances in a safe way.
What is investment and why is it important?
Before delving into the most basic investment terms, it is essential that we delve into why it is necessary to invest. Let’s remember that this financial tactic seeks to allocate part of your money with the expectation of obtaining profits in the future. Unlike saving, which consists of accumulating money without generating higher returns, investing allows you to grow your capital and build a patrimony for you and those you love.
Benefits of investing:
- Capital growth: Helps you grow your money over the long term.
- Inflation protection: The value of money changes over time, and by investing, you can protect yourself from loss of purchasing power.
- Long-term financial goals: Investing allows you to achieve important financial goals, such as buying a home, paying for your children’s college or retiring comfortably.
Key concepts
These terms will help you better understand how the market works and make informed decisions.
Active
An asset is any resource that has economic value and from which you can make a profit. In the investment realm, when we refer to assets, they include assets such as stocks, bonds, real estate and mutual funds. When you invest in an asset, you expect it to generate income or increase in value over time.
Profitability
When we speak of “profitability”, we are talking about the profit obtained from an investment in relation to the amount invested. This figure is usually expressed as a percentage and can be positive or negative. Profitability can come from a variety of sources, such as dividends on a stock, interest on a bond or appreciation in the value of real estate.
Risk
As we have mentioned in previous articles, every investment involves a certain risk, that is, when you allocate your money to an asset, there is a possibility that you will not obtain the expected return or, in the worst case, that you will lose part or all of your investment. It is important to remember that there is a relationship between risk and return: the greater the risk, the greater the gain, but also the loss. Therefore, it is necessary to know your investment horizon and risk tolerance.
Investment horizon
This concept refers to the period of time you plan to keep your money invested in an asset. This horizon can be short (less than one year), medium (1 to 5 years) or long term (more than 5 years). Choosing an appropriate horizon is essential to make decisions that align with your financial objectives and risk tolerance.
Volatility
Measuring the change in the price of an asset over a period of time is fundamental to investing and is known as volatility. Assets with a high index can change drastically in a short period of time, which implies both opportunities for gain and risk of loss. Investments such as startup stocks or cryptocurrencies tend to have high volatility.
Liquidity
It is a concept that you should be aware of when investing, because it means the ease with which you can convert an asset into cash without affecting its market price. Assets such as cash or shares in large companies are usually highly liquid, while real estate or certain investment funds are less liquid because they require more time to sell.
Compound interest
Compound interest is the process of reinvesting the profits earned on an investment so that, over time, the return grows exponentially. This is a powerful tool in long-term investments, as it allows interest to generate new interest.
Return on investment (ROI)
Another metric you should know to measure the return on your investment in relation to the amount invested is the return on investment. This can be calculated by dividing your profit obtained by the initial investment and expressing it as a percentage. ROI is fundamental for you because it helps you evaluate the effectiveness of an investment and compare it with others.
Inflation
You’ve probably heard this term in the financial news, as it refers to the generalized increase in the prices of goods and services over time. It is important to consider inflation in your investments, because it can reduce the real value of your money if your returns do not exceed it.
Broker
A broker is an institution or person who acts as an intermediary between you and the market in which you wish to invest. They facilitate the purchase and sale of assets such as stocks, bonds or currencies, and charge a commission for their services. Nowadays, there are several online brokers that allow trading from digital platforms in a more accessible way.
Trader
A trader is an investor who actively and frequently buys and sells financial assets. They tend to take advantage of short-term price fluctuations, as opposed to traditional investors who seek long-term objectives. This strategy may involve higher risks and requires advanced knowledge of the market.
Types of investments for beginners
If you already know the basics of investing, we can go a little deeper with the types of investments. As we have discussed, there are many ways to spend your money, and each has its own characteristics and levels of risk. Here are some of the most common types of investments:
Actions
Shares represent a share of ownership in a company. When you buy shares, you become a shareholder, which entitles you to receive a share of the profits in the form of dividends and to benefit from the increase in value of the shares if the company grows.
- Advantages: Possibility of high yields.
- Disadvantages: Higher volatility and risk of capital loss.
2. Bonds
Bonds are debt instruments issued by governments or corporations to finance their operations. When you buy a bond, you are essentially lending money to the issuing entity in exchange for receiving periodic interest.
- Advantages: Lower risk compared to stocks.
- Disadvantages: Generally lower profitability.
3. Investment funds
Mutual funds pool the money of many investors to invest in a diversified portfolio of assets, such as stocks and bonds. They are managed by professionals and offer the advantage of diversifying risk.
- Advantages: Professional management and diversification.
- Disadvantages: Commissions and possible limitations in customization.
Basic strategies for beginners
Once you have an idea of the types of investments, it is useful to consider some strategies to help you reduce risk and increase your chances of success.
Diversification
Diversification consists of spreading your investments over different types of assets to reduce risk. If one asset does not perform as expected, the losses can be compensated with the performance of other assets. This strategy is ideal for those seeking stability in their first investments and even when you are already an expert.
2. Investing for the long term
Investing for the long term is a recommended strategy for beginners. Time allows investments to recover from periods of volatility and take advantage of market growth. In addition, compound interest can make your returns grow exponentially.
3. Know your investment profile
Everyone has a different risk tolerance, so it is important to identify your investor profile before getting started. Some common profiles include:
- Conservative: Prefers low-risk investments, such as bonds.
- Moderate: Balances risk with growth potential, as in mutual funds.
- Aggressive: Accepts higher risks in search of higher returns, as in stocks.
Last steps
If you are new to the world of investments, it is useful to have a financial advisor who can guide you in your first decisions. This expert can help you choose the most appropriate assets and build a portfolio aligned with your goals.
Investing can be an excellent tool for building a solid financial future, as long as you have the right knowledge and information. With this guide to the basics of investing, you now have a clearer idea of the essential terms, types of investments and basic strategies. Remember, as a beginner, the most important thing is to learn, research and make informed decisions. Starting with a clear plan and a solid strategy will allow you to move forward in the investment world with confidence and security.
