Introduction to investments
Introduction to Investments is the first in the knowledge series on investments. It is attempted to present a better understanding and perception about investments. Let us start with an old Indian story.
“Once, 6 blind men are brought near an elephant and asked to describe it. The first one touches the side and describes the elephant is like a wall. The second one touches the tusk and calls it a spear. The third one touches the trunk and describes it as a snake. The forth one touches the knee and calls it a tree. The fifth one touches the ear and says it’s a fan. Finally the last one touches the tail and describes the Elephant as a Rope!“
None of them called an Elephant an Elephant. Do you know why? Because their perceptions were limited and this lead to the misinterpretation of fact. They all described the elephant differently, just on the basis of the part of the elephant they touched.
This is how many people perceive about investments. Most are exposed to only one or two types of investments and are carrying a limited perception about the world of Investments. Therefore an integrated approach is made to give a 360 degree perception on investments by covering all aspects and areanas of investments. First in the series is the introduction to investments .
What is an Investment
An investment can be defined as something or an item that is purchased with the intention of getting an income from it or expecting a future price rise. So investment is an activity or a process. This activity consists of following;
1.The investment involves the action of purchase or acquisition.
2.There is something or some item which is purchased and we can call it an asset.
3.In the investment activity there is a purpose or intention involved which we can call a goal.
4.The goal of purchasing the asset is to gain income or for making profit.
In fact this sort of investment is an economic activity. Why because there is a return or profit generation in this activity of investment. There is another sort of investment where there is no financial gain or return generated from the investment. This is when we utilise the funds with us or invest the same to purchase assets like a TV set or a Mobile phone or a motor car. Here the assets are purchased for personal use. We can classify these investments as General investments or consumption investments. We are not focussing on this type of investments in this site.
An investment in the economic sense is sacrificing the personal use of today for future gains. That is the purchase of an asset or goods or items that are not used for consumption today but are used to generate wealth for tomorrow. When we come to the financial side of an investment it is the purchase of a financial asset for generating future income or can be sold in future, for generating profit, at a higher price.
An investment can be referred to any mechanism which is used for generating future income. In other words, investment includes the purchase of Real estate property(land building etc), Equity shares of limited Companies listed on Stock exchanges , Bonds issued by Central or state Governments or various Municipalities or Public sector undertakings, Debentures issued by Limited Companies , commodities like minerals, oil, metals including precious metals like gold etc. or Artwork like Paintings among several others.
As per the Dictionary, to invest is to allocate money in expectation of a future return. In finance the benefit from an investment is called a return. The return may consist of profit/gain realised from the sale of a property or an investment or it may be unrealised capital appreciation (rise in price)or investment income such as dividends from equity shares/stocks, interest from bonds, debentures or bank deposits, rental income from commercial or residential properties etc. It is not necessary that the price of an investment will always go up. Sometimes it may come down also. In that case instead of profit or capital gain, you may incur a capital loss or capital depreciation (fall in price). Return may also be the combination of income and capital gain. As for an example this happens when the shares purchased give us dividend and at the same time the share price also goes up.
Another way of putting things straight is to say that an Investment is simply putting money to work so that you can make more money. Let us make it very clear that Investing is not a get-rich-quick scheme, but rather a way to consistently grow the wealth/savings you already have. The good news is that even with a small sum of money you can start investing.
There are two concepts of Investments:
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Why one should invest?
Now the question arises as to why one should invest his money ?
Investments gain importance in today’s world, because just earning money is not sufficient to take care of our much needed comforts in life. All of us work hard for the money we earn. But most of the times we find that the money we earn is not adequate for us to lead a comfortable lifestyle. That is we want to live in a bigger house, we want to give our children better educational facilities, we want to own a car and we want to go on tours etc.
We may also have to fulfill certain dreams and goals which we have been nurturing in the back of our mind. These goals could be sending the child abroad for higher education or buying a luxury bungalow or a luxury car. Most of the times we can see that the money we earn is not sufficient to achieve above goals. In order to achieve our goals not only we have to work hard but we have to make, the money we earned work harder for us. That is, we have to invest our money to make it grow in size to achieve
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How to start investing?
Now that the question about the necessity of investment is answered it is time to explore the idea of how do one start investing.
One of the most basic question in the mind of people is how to start investing. As a first step one need to see the amount of money that he/she has, in order to begin investing. This money is his capital. One can have this capital by inheritance from parents or ancestors. Another way of having this capital is acquiring it by way of saving. Your saving may be small but still you can start investing. You can even borrow money from friends and relatives and invest, but this website, do not encourage the same.
Savings
It is easy to say save and invest. But it is difficult to start saving if you do not follow certain steps. The first step in saving is start budgeting. Budgeting is necessary to keep track of your income and expenses. Write down what you and others in your family earn and spend each month. That is, on one side “Earnings” will come and on the other side ‘Expenses”. Now include a new category ‘For savings and investing’ on the Expenses side. If both the sides balance. no problem you are on the right track. if not you have to have a relook at the budget. If you are spending all your income, then you will never have money to save or invest. If there is no scope for increasing your income start by cutting back on expenses. Many people get into the habit of saving and investing by keeping aside the amount of savings first and then trying to balance the Income-Expenses statement. This appears to be the right way to start saving. We know it is not an easy task but one has to bite the bullet. Another easy way to do this is to have all your family income credited into your bank account automatically and pay for expenses from that account. There are many ideas and rules for promoting savings, but those will be dealt in detail elsewhere.
Knowledge of assets
So, you have managed to save some money from your earnings. This is your capital. Now the question is what financial product/tool to invest in? The answer to this question begins with the analysis of financial assets available for investment as the first step. We have seen many types of investment vehicles and it is quite normal for an investor to get confused. Someone new to investing may not exactly know where to invest their money. So one has to gain knowledge or understanding of the investment tools available. Making the wrong investment choice can lead to financial losses, which is something that no one wants. So either one should seek expert advice or try to become an expert himself. The aim of this website is to impart investment expertise to people.
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Return vis a vis Risk.
Before concluding let’s probe into the aspect of return vis a vis risk. We have already seen that the benefit or gain from an investment is called return. Risk can be defined as the potential loss in an investment.
The return may consist of investment income such as dividends, interest rental income etc. This might have been generated from investment in equity shares or fixed deposits or property. Or the return may be capital gain (or capital loss) realised from the sale of Real estate asset or a financial investment or it could be unrealised capital gain. The asset price may go up or down and sometimes there may be capital loss also. There may be a situation when the return could be combination of both capital gain and income. For example the Equity shares purchased by you may give you dividend and the share price also goes up giving you capital gain.
You may wonder why one should invest if it results in loss. We have already seen that keeping money idle with us or with the bank is opportunity lost. in order to accumulate large sums to meet one’s financial goals, in order to beat inflation, one must take certain investment risks. Investing is all about taking calculated risks and managing the same, not avoiding the risks altogether.
Investors generally expect higher returns from riskier investments. When a low risk investment is made, the return is also generally low. There are low risk as well as high risk financial tools in the market but experts suggest that young people should opt for high-return high-risk products while older people or those nearing their retirement should go for something that is low on risk and offers moderate but guaranteed returns.
What are you waiting for?
Once the above listed crucial questions are sorted out, that is after confirming that you have got money for investing, you have zeroed in on the goal of investment and identified the investment tool as per your risk profile, the next step is to actually begin investing. This could be done on your own or by taking help. In either case, there is high chance that with the passage of time, you too will start gaining knowledge about investment avenues and related products. The purpose of this website is to give you as much knowledge about investments as to make you feel as an expert.
There is a saying that you cannot learn swimming by standing on the banks and reading books. You have to jump into water to learn swimming. Likewise you have to take the plunge into the investment world to master the art and science of investing.
So what are you waiting for? Take the plunge.