I’ve been investing for about five years now, and many times I still feel clueless about where I should be putting my money. When and which stocks should I be betting on? Join me, as I research the art of investing from the basics, all the way to the Daedalian.
One of the most excellent ways to grow your wealth is through investing. We live in the age of low-interest rates and cheap debt. While profoundly challenging to make a living through investing, it is quite a lot easier than people assume to achieve yields that beat ordinary interest rates.
To begin, what is a share?
A share, simply put, is the partial ownership of a business. Businesses have the option to raise the equity of its company by ‘going public’. Going public means being listed on a stock exchange, and therefore issuing shares to eager investors. This process is generally named the IPO, or ‘initial public offering’. An investor who has ownership of these shares are called shareholders, and in return for owning the company, they are eligible to receive dividends and other benefits.
Share issues can be sold to other investors on the share market, and this way, shareholders can produce capital gains if the price has risen – or in other words, make additional capital by selling their shares for more than they paid for them. Generally, this is the way investors like to make their money.
Why should I buy shares?
My parents are from East Asia, and there, the stock market is shadowed by negative connotations. Quite often, share trading is seen as ‘gambling’ and a ‘big risk’. In my eyes, this is not only an outdated worldview but one that holds many families from financial freedom.
‘Risk comes from not knowing what you’re doing.’
– Warren Buffett
A key advantage of shares is that it allows flexibility and liquidity with your capital. It is effortless and relatively cheap to buy/sell small quantities of shares to free up some cash or merely produce a profit. It is easy to appreciate how easy and straightforward it is to begin investing in stocks; there are not conveyancing costs, stamp duty, or ongoing expenses with exception to the commission by the stockbroker. You have the option to do everything over the internet, and brokerage fees are in fact – contrary to belief – far cheaper than real estate agent fees.
You can abuse this great financial mobility by starting small, buying shares in companies you know. This way you can take time to learn as you go with minimal risk.
Shares for capital growth
Inflation is defined as the general rise in the cost of living. If I give an example based on where I live, The Reserve Bank of Australia aims to keep inflation within a range of 2-3%. What does this mean? The money you have in the present will buy less in the future. Therefore, people invest in shares because they offer the prospects of a price rise.
One of the most famous sayings about successful investing is to ‘not put all your eggs in one basket’. Put it simply, DIVERSIFY. Many investors fall into the trap of putting all their capital into one, promising asset class. Spread your risk, and enjoy the upturns in various markets. There will be more on risk next week!
Stocks, unlike many other options, give a varied range of financial control. I see it as a step toward greater economic freedom and a better life. Owning a share with a rising value allows you to grow your investment and in addition to the increasing share prices; dividend and dividend re-investment can accumulate the capital growth effect of a share investment by multiples.