What is Investing?

Investing refers to the acquisition of assets that are expected to increase in value and provide returns, either as income payments or capital gains. While investing can broadly involve committing time or resources to improve one's life or help others, in a financial context, it specifically entails buying certain assets. 

Investing shouldn't be confused with saving, which focuses on setting money aside for future use. When you invest, you aim to make the money work, ideally increasing its value through strategic placement in assets that can appreciate or provide returns.

In the modern economic landscape where inflation continually erodes the purchasing power of savings, investing has become more important than ever. By investing wisely, individuals can not only preserve their capital but also generate additional income. However, it comes with risks. The value of investments can fluctuate due to market conditions, economic changes, or political events. 

Why Do We Invest?

There are several reasons people invest. However, the aim of all reasons is to achieve financial objectives. One of the primary motives is to grow wealth over time. Although it sounds similar to saving, it is done by putting money to work. 

Buying and selling assets is a big part of making investments. Assets that have the potential to have an increasing value improve the investors' chance to achieve their goals. 

Another important reason is to protect against inflation. Inflation can negatively affect purchase power. To overcome this situation, investors search for assets or investment funds that exceed the inflation rate in terms of value. 

Although investing can help people achieve specific financial goals, such as funding a child’s education, purchasing a home, or building a retirement fund, it can also be done to have a passive income. 

Types of Investments

As we have stated before, the financial markets include different types of assets. These assets vary in risk, return potential, and liquidity, allowing investors to build diversified portfolios based on their goals and risk tolerance. Below are some of the most common types of financial assets:

• Stocks
• Bonds
• Mutual Funds
• Exchange-Traded Funds (ETFs)
• Forex
• Commodities
• Contracts for Differences (CFDs)
• Real Estate Investment Trusts (REITs)

Stocks

Investing in stocks is purchasing shares of a publicly traded company. It is possible to say the investor becomes a partial owner of the company. Buying stocks is one of the most popular investment types. The companies offered for stock trading are usually bigger companies that have found a place on stock exchange markets. 

Stocks offer the potential to benefit from profits in terms of capital and income through dividends when the stock prices increase. However, stock prices can be volatile, and the value may fluctuate due to market conditions or company performance.

Bonds

Bonds are fixed-income securities issued by governments or corporations to raise capital. You can consider buying a bond such as lending money to an entity. In exchange for lending money, investors receive interest payments over time and the return of the principal at maturity.

Corporate bonds are issued by companies, while municipal bonds are issued by local governments. The U.S. Treasury issues Treasury bonds, notes, and bills. All these are types of debt instruments that investors purchase.

Although bonds are considered less risky, they come with some risk like all investment types, however, they offer lower returns. 

Mutual Funds

A mutual fund involves the basket of money of multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. 

There are two ways of managing mutual funds; active and passive. Actively managed mutual funds involve a fund manager to make decisions when selecting securities to invest money of the contributors. A passively managed mutual fund follows a major stock market index like the S&P 500 or Dow Jones Industrial Average. Passive mutual funds are also known as Index funds as well. It is important to point out that while a passively managed mutual fund follows a major stock market index, an actively managed mutual fund tries to perform better than a major stock market index via the fund manager.  

Exchange-Traded Funds (ETFs)

Similar to mutual funds, ETFs hold a collection of securities, and they also follow a market index or specific sectors. What is not so similar to mutual funds is that ETFs are purchased and sold through stock markets. This can provide more flexibility in buying and selling. 

ETFs generate income by pooling returns from all their investments. Starting with trading ETFs is a good choice for beginners because of the diversified portfolio options compared to stock trading. 

Forex (Foreign Exchange Market)

Forex trading is basically exchanging currencies with the aim of making a profit from the fluctuation in currency values. The Forex market is highly liquid and it operates 24/5. This trading is performed through certified brokers. If you are into short-term trading, then forex can be a good option for you. 

Forex has the advantage of higher leverage. You can earn more profit with the same amount of money compared to other investments. However, you need to keep your eyes on your trading. That's why it is important to work with a reliable forex broker to manage your portfolio and get good profits. You can take a look at ZitaPlus' forex trading page, as we are a BVI-regulated broker. 

Commodities

Commodities are physical goods that can be invested in. These goods include metals (gold, silver, copper, etc.), agricultural products (wheat, corn, soybeans, etc.), livestock, and energy products (crude oil, natural gas, etc.) Commodities tend to perform well during periods of inflation or geopolitical uncertainty, offering a hedge against market volatility.

Investors often make money from commodities by trading futures contracts. It is also possible to invest in commodities indirectly through stocks, mutual funds, ETFs, or futures contracts.

Contracts for Differences (CFDs)

Contracts for Differences (CFDs) are financial derivatives that enable traders to speculate on the price fluctuations of numerous financial instruments, including stocks, indices, commodities, and currencies, without actually owning the underlying asset.  

CFDs are agreements made between a trader and a broker, where they settle on exchanging the price difference of an underlying asset from the moment the contract is initiated to when it is closed. Just like forex trading, it is recommended to work with a broker to trade CFDs. You can take a look at ZitaPlus' CFD trading page as well. 

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate. They allow individuals to invest in large-scale, income-producing properties such as office buildings, shopping malls, hotels, and apartment complexes without having to buy or manage the properties directly.

Investors can make money from REITs in two primary ways:

REITs typically pay out a large portion of their earnings as dividends, providing a regular income stream.

The value of the REIT shares can increase over time, allowing investors to profit from capital appreciation if they sell their shares at a higher price than what they originally paid.

How to Invest: Strategies and Approaches

There are various strategies investors can use for their financial goals, depending on their risk tolerance, time horizon, and objectives. Let's take a look at the most common approaches to building and managing a solid portfolio.

Long Term vs Short Term Investing

Based on your objectives, you can decide to either take a long-term or short-term approach. Long-term investing is basically buying and holding. When you take a long-term approach, you aim to get a return that is seen as more guaranteed than other investments. Long-term portfolios include more stable assets that are known to have profit on a long-term basis. 

However, short-term investing involves buying and selling assets within a shorter timeframe. The short-term approach is for people who want to get quicker returns. Contrary to long-term, it is considered more risky but the return may be higher than long-term investments. 

Growth vs Value Investing

Growth investing involves selecting stocks or other assets that are expected to grow at an above-average rate compared to the market. Investors focusing on growth typically seek companies with high potential for earnings expansion, even if their current valuations are high. 

Value investing, on the other hand, focuses on buying assets that are undervalued by the market. Value investors look for companies with strong fundamentals that are currently priced below their intrinsic worth, aiming for long-term appreciation as the market corrects these undervaluations.

Technical vs Fundamental Analysis

These two methods are commonly used to analyze investment opportunities. If an investor wants to be a good trader, they should know these two methods well.  

Technical analysis involves studying price movements, chart patterns, and trading volumes to predict future price direction. These technical indicators can help you develop effective trading strategies. This method is better for short-term traders who are used to trading all the time. 

Fundamental analysis, on the other hand, focuses on the intrinsic value of an asset by evaluating its financial statements, industry position, and broader economic factors. It is helpful to see the reasons behind price fluctuations. Although this method is a good option for long-term investors, combining technical analysis with fundamental analysis can really help you build a solid trading/investment strategy. 

Diversification

Diversification is a risk management strategy that involves spreading investments across various asset classes, sectors, or geographic regions. By holding a diverse mix of assets, investors can reduce the impact of poor performance from any single investment, as losses in one area can potentially be offset by gains in another. In a way, diversification is the perfect method to minimize risk without sacrificing potential returns. 

Risk Management

Effective risk management is essential for any investment strategy. This includes setting stop-loss orders to limit potential losses, properly sizing positions to avoid overexposure to any single asset, and regularly reviewing and adjusting the portfolio in response to market conditions.

Setting top-loss orders can help you minimize the risk by not letting your investment go under a certain level. Precautions such as this can help you focus more on your strategy rather than risks. That is why, always come up with precautions to trade in a more relaxed environment. 

Risks in Investing

Every investment carries a certain level of risk, and understanding these risks is crucial for making financial decisions. Investors should be aware of these risks and take precautions. We have already mentioned some of the precautionary methods but what about the risks? Here are the most common risks associated with investing:

• Market Risk
• Liquidity Risk
• Credit Risk
• Inflation Risk
• Political and Economic Risks

Market risk is basically the possibility of losing money due to overall market fluctuations. Factors such as economic downturns, political instability, and unexpected events can cause the value of assets to decline. Stocks, for example, are highly susceptible to market risk, as their prices can be volatile based on market sentiment and macroeconomic factors.

Liquidity risk arises when an investor is unable to quickly sell an asset at its market value. Some assets, such as real estate or certain bonds, can be harder to convert into cash without a significant price reduction. 

Credit risk occurs when the issuer of the bond may default on their interest payments or fail to return the principal. It is primarily associated with bonds and fixed-income securities. 

Inflation risk is the possibility of a decrease in purchasing power of returns due to rising prices. Even if an investment generates positive returns, inflation can diminish the actual value of those gains.

Political and economic risks include external factors such as changes in government policies, economic instability, or geopolitical events. These factors can negatively affect the value of investments. These risks can affect specific sectors or entire markets, leading to unpredictable changes in asset prices.

Speculation vs Investment

Speculation and investing are distinct approaches to allocating capital. Both involve buying assets with the expectation of financial gain, but the methods, time horizons, and risks differ significantly between the two.

Speculation is the act of purchasing assets for quick profit based on price movements. Speculators often pursue short-term fluctuations and approaches. 

Investing typically involves a long-term approach, where the focus is on the potential for the asset to generate returns over time through capital appreciation, dividends, or interest.

Key Differences Between Speculation and Investing

Speculation

• Higher risk
• More volatile markets
• Trading cryptos, penny stocks, or options
• Higher profits and losses in short term

Investing

• Relies on research and analysis
• Returns over time through capital appreciation, dividends, or interest
• Less risky due to long-term approaches
• Based on assets' performance

Shortly, Investing

In summary, investing plays a crucial role in wealth building and financial security. It offers individuals the opportunity to grow their assets, protect against inflation, and achieve long-term financial goals. While there are many types of financial investments, each comes with its own set of risks and potential rewards. 

Understanding different strategies, managing risk effectively, and distinguishing between investing and speculation are key factors in making informed decisions. By taking a thoughtful and informed approach, individuals can navigate the financial markets with greater confidence and increase their chances of long-term success.

FAQ

What is the difference between trading and investing?

Trading focuses on short-term market movements to make quick profits, while investing involves buying assets for the long term, aiming for gradual growth over time.

Why do people invest?

People invest to grow their wealth, protect against inflation, achieve financial goals (like retirement), and generate passive income.

Long-term vs short-term investing

Long-term investing involves holding assets for years to benefit from gradual growth, while short-term investing focuses on quicker profits by taking advantage of market fluctuations within a shorter time frame.

What are the main types of financial investments?

The main types include stocks, bonds, mutual funds, ETFs, forex, commodities, REITs, and CFDs, each offering different levels of risk and potential returns.

What is diversification in investing?

Diversification involves spreading investments across different assets to reduce risk, ensuring that poor performance in one area can be offset by gains in others.

What is the key difference between speculation and investing?

Speculation focuses on short-term price movements for quick profits, while investing is a long-term strategy aimed at steady growth based on an asset's fundamentals.