What is investment - Introduction for Beginners


General introduction about investment. A basic overview for beginners without going into the technical concepts.

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What is investment all about?

Investment is the allocation of money to generate future economic benefits. Its purpose is to increase wealth to preserve or increase purchasing power to hedge against inflation.

 

Why should I invest?

You should invest to hedge against inflation. Inflation is the increase in prices of goods and services over time and as a result, a dollar in a future point in time generally will not buy you as much as it would today. In other words, inflation erodes the future value of money you hold today. Prices of goods and services may or may not increase overnight but it will increase gradually. Investments could also potentially bring in additional income to increase your purchasing power. 

Investments are not necessarily always profitable. There are risks present in any investment. Part of making the right investment is learning from your mistakes so the earlier you start investing, the more time you will have to learn from your own experience and from others’ experience to become a better investor tomorrow.

 

Types of investments generally available

  • Fixed Income (Banking products - savings account, term deposit, etc; bonds / debentures; annuities)
  • Insurance
  • Real Estate
  • Managed Funds
  • Exchange Traded Funds (ETFs)
  • Shares
  • Options, Warrants Futures
  • Forex (Foreign Currency)
  • Commodities (Gold, silver, crude oil, etc)
  • Alternative and Complex Financial Instruments (Convertible bonds, Certificate for Difference (CFDs), Mortgage Backed Securities, Hybrids, etc)
  • Cryptocurrency (Digital Currencies)
  • Owner Operated Business

 

How do I start investing?

It is a general view that money is required to start investing. That is correct but it is more important to begin with basic knowledge of the investment you wish to pursue. Many people invest in products they know very little about and ended up losing their money. Smart investment begins with educating yourself before you put your hard-earned income and life savings at risk.

You don't have to learn everything to be an expert but at the minimum, you will need to know what you are dealing with before you start investing. This will help you to better assess the potential risks and return.

Due to different personality and financial situation, the level of mental tolerance to financial losses varies from one individual to another. Before you start investing, ask yourself the following questions to assess your risk tolerance:

  1. What is the minimum rate of return I want to achieve and how much money am I willing to risk losing in exchange for this rate of return?
  2. How much money am I willing to risk losing given other rate of return available in the market
  3. Am I willing to put myself in a frustrating and risky situation that could drain my social life, physical and mental health in addition to financial loss?
  4. To what extent can I tolerate this? (What is the maximum amount of loss I can accept to keep myself mentally at peace?)
  5. Do I have sufficient cash flow and financial backup at the very least to pay my bills and feed myself and my family in the event where I incur the maximum loss from my investment?
  6. Do I have adequate insurance protection?

 

You’ll also need to take the time to research the investment products you are interested in. If you are unsure how, use the followings as a guide:

  1. Find out which local brokers and financial institutions offer the investment. You can simply search online or contact them to enquire.
  2. Contact their branch representatives to get details about the products' risks and return, withdrawal restrictions, as well as the associated fixed and variable fees (not forgetting any hidden fees)
  3. Read about investment reviews from news and publications. You can find many articles online today. Be careful to select only well-known, legitimate websites from a legally registered organisation to avoid being misled by unreliable information. In all cases, do not rely solely on what you read or hear. Always seek independent, professional advice if in doubt.
  4. Compare the products and fees offered by different financial institutions
  5. If you are interested in managed funds, it may be helpful to check and compare the funds' historical performance
  6. Seek independent, professional advice to confirm your research and for further advice if required.

 

Once you have considered the above, you would have invested mostly your time. Only then you can get ready to invest your money.

If in doubt, always speak to an independent licensed financial advisor.

 

Where do I seek independent professional advice?

You can start by searching online. A licensed professional advisor will have a license or registration number that you can verify from the regulatory websites (e.g. ASIC in Australia). If you are not sure, always choose well-known businesses. Most well-known banks and investment institutions offer this service too. They will most certainly have a valid license granted by authorized regulatory bodies. Always find out if they receive any direct or indirect benefit (commissions, interest, etc) from any sort of advice given to you.

 

Protecting myself from scams/fraud

Many people have been targeted by scammers and fraudster and unfortunately many have become a victim and unable to recover their losses. These syndicates seek the following attributes among many others when selecting their target victims:

  1. People who have little or no knowledge about investment.
  2. People who, for fear of losing out, would rush to invest without researching the investment product and the risks associated with it
  3. People who are too eager to get rich quick

 

How do you know an investment is a scam or fraud? Unfortunately, in many cases, there are no straight forward answer but you can watch out for certain warning signs below.

  1. The agent promise you a get rich quick scheme with minimum effort or risk
  2. The business is not legally registered
  3. There are no contact and business registration information provided on their product leaflets and the agent is reluctant to provide the details to you
  4. You are required to pay an expensive membership fee to participate
  5. You are incentivised to recruit more members or investors via commissions from new recruits
  6. They promised good or high returns but to get there, your profits or income from the investment is highly dependent on the number of members or investors you recruit
  7. They share with you rags to riches stories about themselves becoming a millionaire almost instantly overnight, living a luxurious life and travelling around the world - or similar stories from other members who have invested in their product
  8. You are being urged to get in quick or lose out
  9. The organisation is in the list of scamwatch in your country or in another country’s red alert list
  10. There are many unfavourable feedback and complaints about the organisation

 

These are not necessarily indicative of the presence of fraud but it is a safer bet to stay clear of those opportunities until they are proven safe from scams or frauds. It is also important to note that just because a business is registered does not necessarily make them safe to invest in. Some businesses were able to continue running for years until they were proven a fraud but more often than not, a lot of people would have already fallen victim and lose their money.