What are the basics of investing? So, Are you a beginner who wants to get enter into Stock Market? Don’t Worry I gonna help you with a complete guide that How to invest in the stock market? If you want to learn about How to invest Basics? Then you’ve found the correct article for your search queries like How to learn basics of investing? etc.
Believe me, these tips are best for investing in stocks for beginners. After reading these articles you won’t have to search for “How to invest in stock”
- 1 What Are The Basics Of Investing
- 2 How To Invest Basics: Savings
- 3 Investments:
- 4 Inflation:
- 5 Investment Planning:
- 6 A. Knowing where you are:
- 7 B. Setting For Your Financial Goals:
- 8 Inflation Effect:
- 9 C. Risk Assessment and Asset Allocation:
- 10 D. Finding and Funding the Gap:
- 11 E. Monitoring and Evaluating your Financial Plan:
- 12 Golden Rules of Investments:
- 13 How to invest in stocks for beginners with little money?
- 14 List of Various Investment Avenues:
- 15 Summary
What Are The Basics Of Investing
Before we get into the details of the Stock Market, let’s first understand the terms ‘Savings’ and ‘Investments’ and their importance in an individual’s life.
How To Invest Basics: Savings
The amount left with an individual after meeting the cost of living from the amount that he or she earns in a given period of time is known as savings. These savings are used to meet future needs and expenses.
Now, instead of keeping these savings idle, it is advisable to use them for getting good returns on it for a better future ahead. In financial terms, this activity is known as Investing.
In finance, investment refers to the allocation of surplus money, after all, expenditures in some investment avenue (like Gold, Bank Deposits, Post Office Saving Schemes, PPF, Mutual Funds, Shares, etc) with a goal of generating income or appreciation in the value over a period of time.
Investments help you to meet your long-term needs and large financial goals. There are certain levels of risk attached to all types of investments. The higher the risk, the greater the chances of higher returns.
Here I would like to mention a famous quote from Warren Buffet,
“Do not save what is left after spending instead spend what is left after saving.”
In the olden days, somewhere around the 1920s, prices of most things remained more or less constant and even if they did rise, it was just a marginal rise taking place over years. Read Also | What is a virtual data room?
However, this scenario started changing from 1950 onwards and prices of things started rising gradually. But in the last few decades, the rate at which prices have been increasing is much faster.
Let me explain this with an example.
When I was a teenager, a movie ticket used to cost around one rupee. Today the value of the same ticket would be around Rs. 200 or Rs. 300 or even more. There was a time when people used to work for a salary ranging between Rs. 250 to Rs. 400 per month.
Now for similar work they are paid somewhere between Rs. 25,000 to Rs. 40,000 per month, or even more. This means that, if the price of everything goes up, the income also goes up. This increase is because of inflation and to beat this inflation we need to invest our money so that it generates returns in excess of the inflation rate. I shall explain this ahead with an example.
Inflation is the rate at which the cost of living increases and the value of money decreases. In other words, money will not buy the same amount of goods or services in the future as it does now or did in the past. Suppose the annual rate of inflation is 7% and bank interest is 6.5% per annum. It means that the real return you get from your saving is -0.50% i.e., negative real return.
Investing money will be fruitful only when you get a positive real return on it. In other words, the aim of investment should be to provide a return above the inflation rate to ensure that there is no decrease in the value of your money.
Investment Planning is a step-by-step process to ensure that you plan and invest your money in the best way so that you can make the efforts required and constantly meets all your goals. Below mentioned are the important steps involved in the process of financial planning.
Steps to Financial Planning:
A. Knowing where you are:
To start the process of investment planning, the first thing is to know what your financial current position is. Unless you know this, it might be difficult for you to know what you require to achieve your goals. In order to do this, you need to record all the information in a systematic manner.
Primarily, you need to look into the following issues –
- How many people are dependent on you?
- What are your present assets and liabilities?
- What is your present cash flow situation i.e., your monthly income and expenses?
- How much taxes you are paying and can you reduce your tax out go through proper planning?
B. Setting For Your Financial Goals:
In How to invest basics, Financial planning is the exercise that should be carried out to achieve preset financial goals, otherwise, they remain only dreams.
Your goals should be S.M.A.R.T. (Specific Measurable -Achievable – Realistic – Timely) All your investments should be for a specific period i.e. short-term (less than 1 year), medium-term (more than 1 year), and long-term (more than 5 years).
It is difficult to achieve all your financial goals with your limited resources therefore you need to prioritize your goals which will help you in allocating existing resources and future investments towards a more important goal.
It is necessary to quantify future financial goals in the current rupee value so that a reasonable rate can be added which incorporates inflation in it.
|Financial Goals||Current Cost||Time Frame||Future Cost|
|Purchasing A New House||$7000||3 years||$8000|
|Student’s Higher Education||$10000||15 years||$20000|
C. Risk Assessment and Asset Allocation:
Investment-related assets can be broadly classified into Equity, Debt or Fixed Income, Real Estate, and Commodities. and Cash.
Any investment can be classified into one of these categories or asset classes. All of them grow at different growth rates over the long term and carry a different amount of risk.
Analyze the risk you can take and develop an appropriate asset allocation strategy.
D. Finding and Funding the Gap:
Now based on your asset allocation you will know the average yearly return that your portfolio will generate over the long term.
Using this value of average yearly return, you can calculate the amount you need to invest every year to achieve all your financial goals smoothly.
Now that you know how much you need to invest every year, the next step is to arrange these funds. If there is a big gap between your current savings and the amount required to be invested every year to achieve your goals, then you need to rework your strategy by –
1. Reprioritize your goals, increase your time horizon, and reduce your expectations.
2. Adjust and maintain your cash flow properly i.e., increase your income or decrease your expenditures.
3. Increase your risk-taking abilities.
E. Monitoring and Evaluating your Financial Plan:
Financial planning does not end with the investments made by you. It is necessary to regularly monitor and periodically evaluate your investments to ensure that things are happening as per your plan.
The returns generated by the investments should also be monitored and rebalancing of investments should be made as per the asset allocation strategy.
To explain the importance of Investments and Investment Planning, I shall quote Warren Buffets’ famous saying –
“If you don’t find a way to make money while you sleep, you will work until you die.”Warren Buffet’
Golden Rules of Investments:
- Start saving as soon as you start earning.
- Keep enough contingent money aside before investing.
- Take adequate insurance before investing.
- Start investing as soon as possible.
- Invest at regular intervals of time and never try to time the market.
- Invest for the long term.
- Always diversify your investments, i.e.; “don’t put all your eggs in one basket”.
- Never invest in anything you don’t understand.
- Try to re-invest income earned from your investments to boost your overall return.
- Review your investments periodically.
How to invest in stocks for beginners with little money?
If we talk about ‘How to invest basics tips’, Even if you can’t afford to invest a lot, the money you invest today will double every 6 to 10 years and could be worth 50 times today’s amount by the time you retire. So instead of waiting for long, start investing today even if the amount you invest is very small.
Investments take time to grow; therefore one of the most important ways to accumulate wealth is to start investing as soon as possible. The power of compounding is like a miracle. A regular investment even of a small amount if given sufficient time to grow can generate real wealth.
The aim of investing is to make money, but sometimes investments lose their value.
To reduce this risk and to ensure that your investment portfolio performs as you expect, you need to consider some points before investing –
- Your investment goals.
- Available funds for investing
- Time available with you to manage your investments.
- Knowledge about different investment avenues.
- Your risk-taking ability.
Criteria for Selecting Investment Avenues:
Following are some of the important criteria that one must keep in mind before investing in any investment avenue –
- Associated Risk.
- Expected Return.
- Cost Involved.
- Diversification Offered.
- Efforts and Expertise are required for managing them.
List of Various Investment Avenues:
Below we have listed some of the common and most widely used investment avenues –
- Bank Fixed Deposits
- Public Provided Fund (PPF)
- National Pension Scheme (NPS)
- National Savings Certificate (NSC)
- Mutual Funds
- Bonds and Debentures
- Pension and Annuity Schemes
- Other Post Office Saving Schemes
- Insurance Schemes like Endowment, Money-back Plans
- Gold and Silver
- RBI Bonds
- Infrastructure Bonds
- Tax Saving Schemes
- Investment Basics
- Real Estate
Each of these investment avenues differs from the other based on their associated risk, expected return, features, etc, and have their pros and cons. To know more about these investment avenues you can read the book “INVESTMENT PLANNING” .
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