Investing can foster one of the most integral parts of life: growth. So if you’re looking to build long-term wealth and create the financial means to achieve life-long goals, investing can be the key to unlocking these freedoms. To get you started, we’ve put together an overview of what investing is, what people invest in, how people invest, and what you might need to start your investment journey.
Key takeaways:
- Investing can be an effective way to build long-term wealth and unlock financial freedom
- When you invest, you can expect to earn a profit on the money you have invested, otherwise known as an investment return
- Investment returns compound (grow bigger and bigger) each time you reinvest them, helping you to reach financial goals faster
- Investments are referred to as assets, which are grouped into asset classes, such as cash, stocks, bonds, real estate, commodities, and alternatives
- Anyone can start investing, regardless of experience or financial situation. Even just a little money can go a long way.
What is investing?
Whether consciously or not, we constantly invest throughout our lives, whether it’s our time getting a university degree or our energy learning how to cook a new recipe. Often, we do these things because we expect them to bring us value in the future, such as landing that dream job after finishing university. When it comes to the financial side of investing, the concept’s very similar: you put money into something with the expectation that you’ll achieve a financial profit in the future.
The profit you earn from financial investments is commonly referred to as an investment return, which is expressed as a percentage. For example, if you were to invest €1 000 in something and at the end of the investment period, you get back €1 100 – your profit is €100, giving you a 10% investment return.
Why do people invest?
For hundreds of years, people have used investing as a means to build wealth. The reason long-term investing is so effective is because of compound growth. Investment returns compound (grow bigger and bigger) each time they are reinvested, helping you reach your financial goals faster. For example, if you invest €100 a month over the next 20 years at an 8% interest rate, each year, your funds grow at a faster pace. The idea is that by the end of the investment period, you have significantly more money than if you’d added the same amount to a savings account.
For many, this provides the financial means to pay for education, homeownership, cars, travel, retirement; the list goes on! So people often look to investing because it can provide them with opportunities.
Saving vs. Investing
Saving focuses on preserving money, so it’s there when you need it. For example, if you were to put away €50 a week for the next 5 years, you’d have those funds readily available to you at the end of that period. You don’t usually earn any returns when saving because there’s essentially no risk involved (even with interest-bearing savings accounts, returns can be negative due to inflation).
With investing, on the other hand, you can expect a return from the money you’ve invested, but there’s a chance that you might not get back some (or all) of the money you invested or achieve any profit. This uncertainty, however, can be managed through investment strategies (which we’ll discuss later in this article).
Usually, the higher the risk of an investment, the higher the potential return. This is because, as an investor, your reward (return) is generally based on an investment’s level of risk – something called the risk and return tradeoff.
The term investing is often used interchangeably with trading; however, they are quite different. At a high level, investing focuses on generating investment returns over long periods. Many people already participate in this kind of investing through government-led retirement schemes. In contrast, trading focuses on short-term returns through the frequent buying and selling of investments. In addition, there’s speculative investing, where there are abnormally high levels of risk involved, and therefore, future returns are incredibly uncertain.
Who is the typical investor?
Investors are split into two main types: private (everyday individuals) and institutional (companies or organizations). In Europe, these investors collectively invest trillions of Euros every year. In Germany alone, there are over 50 million private investors across 21 million households who invest their money1. Other countries with a lot of private investors include France, the Netherlands, Italy, and Luxembourg1.
What do people usually invest in?
When you own something of value that can be converted to money, it’s described as an asset. Assets can be liquid, meaning they can be quickly converted to money or illiquid, where it’s more timely and complex to turn them into money. In the investment market, assets are categorized into asset classes, which are groups of assets with similar characteristics. Some examples of popular asset classes are:
Stocks
Also known as equities or shares, a stock represents an individual share of ownership in a company or corporation. Companies sell their shares to the public via stock exchanges, where buyers and sellers can trade stocks. This form of investing is one of the oldest in the world, with the first stock exchange, the Amsterdam stock exchange, beginning in the early 1600s.
Some stock investments pay out dividends to investors, which are a proportion of a company’s profits, and then others, investors just buy and hold in the hope that they grow in value over time. Although stocks are a risky asset class, they’re prevalent in the media, being one of the most talked-about asset classes.
Bonds
Bonds are debt-based investments. When an investor purchases a bond, they’re essentially loaning their money to support the financial needs of a government or corporation. When you become a bond-holder, you receive fixed repayments of the money you’ve invested plus interest, so you receive a return on top of your initial investment.
There are two main bond types: government bonds and corporate bonds, both of which are rated depending on how risky the borrower is, e.g., the likelihood of them missing a repayment to you. Bonds with excellent ratings are referred to as investment-grade bonds, and bonds deemed more risky are called high-yield bonds. Investment-grade bonds usually offer relatively low returns; however, their low-risk nature attracts many investors, especially those who are more risk-averse.
Real estate
Real estate is an asset class that we’re all familiar with. It’s the homes we live in, the places we shop, and the offices from which we work. A real estate investment represents the ownership of land plus any buildings on that land. Although real estate investments are considered risky, it’s one of the most common (and expensive) asset classes in the investment world. As well as private investors, it’s popular among institutions with multi-billion dollar funds that purchase and develop real estate purely to earn investment returns.
Commodities
Commodities also represent things that we’re surrounded by in our everyday lives. A commodity is a tangible (physical) good that can be traded, such as raw materials or agricultural products. Typical examples are sugar, gold, oil, and wheat. For something to be a commodity, it has to be produced or sold in a similar quality by many people/companies. Commodities such as gold have been traded and invested in for thousands of years and form a part of many investment portfolios.
Alternatives
Historically there were only a handful of main asset classes for investing, such as stocks and bonds; however, alternative investments have gained popularity over the years. Some alternatives have been around for a long time but weren’t as accessible as now, such as collectibles like art and wine. Others have surfaced through technological innovation. For example, fintechs (businesses that enhance financial services) like Mintos are leading development in the alternative finance market by opening up the asset class of loans to retail investors. Another example of technology-driven investments is digital assets like cryptocurrencies.
Cash
Although cash is more about saving than investing, it’s considered an asset class. Cash represents the money in your bank account or any savings you might have in a fixed-term deposit. Cash is a low-risk asset class, as it’s readily available when investors need it – even if it’s in the form of a fixed-term deposit as these are usually short-term.
Where to start if you’d like to begin investing
Ways of investing come in all shapes and sizes, and how investors choose to invest usually comes down to their prior experience and financial objectives. Although the investment landscape may seem vast, there are options to suit everyone.
A great way to get started is to set investment goals. Once you have some clarity around your goals and budget, you can begin to research which assets or asset classes suit your financial objectives and your risk appetite.
Investment platforms that offer simple, automated investing strategies can be an easy place to start. These strategies are built using expert analysis and data, reducing the need for prior expertise or timely in-depth research. Investments in Exchange Traded Funds (big investment portfolios that investors can buy shares in) are also relatively straightforward. They’re managed by investment firms and require no work from the investor’s perspective. Or, if you’d like to have more control, you can research and manually make individual investment decisions through investment platforms or brokers.
Some investors only have one asset, such as a real estate investment, while others own many different assets, forming what’s known as an investment portfolio. When creating a portfolio, it’s important not to put all of your eggs in one basket. It can be beneficial to invest smaller amounts of money across multiple assets, so your lower-risk investments balance out your higher-risk investments – an investment strategy known as diversification. Doing this can often increase the chances that you’ll achieve the returns you expected.
In terms of money, many platforms only require small amounts to get started; for example, on Mintos, you can begin investing with €50. When you invest responsibly, even a little money can go a long way and bring you closer to achieving financial freedom.
If you’d like to check out the options on Mintos, see Investing with Mintos.
