4 min read

Welcome to the exciting world of investing! If you’re new to this journey, fear not. This post is your starting point, a crash course designed to explain the basics before we dive into more advanced concepts and I share my own strategies. Let’s begin.

Investing is about putting your money to work to achieve future financial goals. It’s a journey that requires patience, knowledge, and a strategic approach. Here are the fundamental principles:

1. Risk and Return: The relationship is simple – higher potential returns usually come with higher risk. Understanding your risk tolerance is key to crafting a suitable investment strategy.
2. Diversification: Don’t put all your eggs in one basket. Diversifying your investments across different assets helps manage risk. A well-balanced portfolio might include stocks, bonds, and other instruments.

Now, let’s explore some common financial instruments you’ll encounter on your investment journey. These will be part of your investment toolbox:

1. Stocks: When you buy a stock, you own a piece of a company. Stocks offer the potential for high returns but come with higher volatility.
2. Bonds: Bonds are debt securities issued by companies or governments. They pay periodic interest and return the principal at maturity. Bonds are generally considered lower risk compared to stocks (excluding junk bonds that are issued by highly risked institutions).
3. Mutual Funds: These are investment vehicles that pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities. They provide instant diversification, managed by professional fund managers. Their fees are usually higher than other instruments and their success greatly varies (majority of them do not outperform benchmark index funds, ETFs).
4. Exchange-Traded Funds (ETFs): Similar to mutual funds, ETFs trade on stock exchanges. When you buy an ETF (selection based on geography, industry and many other options), you actually buy fractions of many different stocks. They offer diversification and are known for lower expense ratios. They are the building blocks of passive investing.
5. Options: Options are financial contracts that give the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price within a specified time frame. Trading options require technical understanding of how they work (they are complicated) and can be very risky for beginners.
6. Forwards: A forward contract is an agreement between two parties to buy or sell an asset at a future date for a price agreed upon today.
7. Commodities: Investing in commodities involves trading physical goods like gold, silver, oil, or agricultural products. Commodities can provide diversification and act as a hedge against inflation.
8. Cryptocurrencies: Digital or virtual currencies like Bitcoin and Ethereum. Cryptocurrencies operate on decentralized networks based on blockchain technology, providing a new form of investment with high volatility and potential returns.

Apart from having a basic understanding of common financial instruments, it is also critical to outline your action plan before making the first purchase:

1. Define Your Goals: What are you investing for? Is it retirement, a house, or education? If you’re saving for a short to medium-term goal like buying a car, it’s wise to avoid very risky investments that can fluctuate, potentially resulting in losses when you need to sell. However, if you’re saving for retirement and have many years ahead, you can afford to take more risks, knowing you’ll have time to recover from any downturns, as markets tend to cycle. Therefore, it’s important to clearly define your financial goals to tailor your investment strategy accordingly.
2. Assess Your Risk Tolerance: Consider your comfort level with market fluctuations. If you’re not comfortable with taking risks, it may be better to avoid stocks or cryptocurrencies and instead focus on ETFs. Your risk tolerance should influence how you allocate your assets.
3. Educate Yourself: Stay curious. Read books, follow reputable financial news, and continue learning about different investment options. As you learn, your investment strategy will evolve, leading to more informed decisions. Always make your own research before investing.
4. Start Small: Start with an amount you feel comfortable with. As you gain confidence and knowledge, you can then adjust your regular contributions accordingly.
5. Do Not Time the Market: Stick to your strategy and invest regularly. Successful investing is about time in the market rather than timing the market.

Remember, investing is a journey, not a destination. This crash course is your first step. Stay tuned for more detailed insights and strategies as we navigate the exciting world of finance together.