What is Investment?
What is investment? How does the stock market work? How to invest wisely, even if you have little money.
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Investing can seem terrifying: there's lots of jargon to learn, there are tens of thousands of places to put your money, and you could lose it all. Even the world's top investment banks lose money making risky bets on complicated financial instruments they don't understand and can't explain. What can a small investor like you do?
There's good news. You don't need a Wall Street to English dictionary to understand things. You can invest at your own pace, your own level of expertise, and your own level of comfort. Leave the risky and strange investments to others. Investing wisely can be easy and even fun.
Investment Means Your Money Works for You
Investment means putting your money to work for you to make more money. That's it. Imagine you want to move a big boulder. It's too heavy for you to push on your own, but if you can wedge a sturdy tree branch under the edge of the boulder and lean down on the other end, you have more power. The longer the branch, the easier your job is. That's leverage.
Investing is like that. A business may have a huge goal in mind (build a $100 million factory to make robots to teach poor schoolchildren in Canada how to read) but may not be able to afford that factory right now. By offering the right to share the profit from the results of building that factory, the business might be able to raise enough money to afford the factory and start building the robots—and, hopefully, earn back the borrowed money and more.
Make Good Investments with Little Money
You can start investing with $1000 or less and as simple as putting everything into an index fund. You can start there and go for years without worrying about whether your stocks are up or down. History suggests that, over the long run, a conservative 7-8% return is achievable with almost no work on your part.
What's the best investment for you? That depends. It may be gold, mutual funds, ETFs or even a bond fund. That depends on your investment goals, your tolerance for risk, and how much you can afford to invest. You do want to beat the average return and beat inflation. That implies growth, but that doesn't limit you to the large cap funds or the blue chips that make up the Dow Jones index.
Investing Uses Money to Make Money
Investment means using money you don't need right now to buy the right to more money in the future.
Think about what happens when you deposit money in a savings account at your credit union or bank. Your institution loans that money out to someone else to buy a car or a house or a robot factory. In return, your financial institution charges a little fee every month—interest payments—and you get a portion of that. Both of you make a little money off of the deal.
Because you're not currently spending that money, you can let someone else use it for a price, and you get to keep some of that price. Debt is leverage, and sometimes it can work to your advantage.
How to Invest Wisely
Your credit union has to be careful where and how it lends money. A nice young family that makes $50,000 annually might be a good candidate for a $150,000 mortgage, while a teenager who's never held a job is a bad candidate for a $500,000 loan. In the same way, not all stocks are created equal. Even if you have only a little money to invest, choosing good investments is important.
Choosing a wise investment is both easy and difficult. It's easy to understand: invest in businesses that demonstrate that they can earn more money every year. It's difficult to put into practice: finding and understanding the value of these businesses can take time.
This is good news for you. Investing doesn't have to be scary. You can start small and look for good values over the long term. That's the same strategy that master investors such as Warren Buffett and Charlie Munger (the gurus of Berkshire Hathaway) and their mentor Benjamin Graham follow. Keep in mind that investing is leverage (a little money applied now to make a bigger change later) and that the real secret to making money while investing is to put your money in businesses that know how to make real money.
What next? You may or may not have some stock choices in mind. Maybe you have a tip from a friend or relative. Before you open an account and hit "Buy", start with an overview of value investing to figure out what can really make you money in the long term.