Basics of Investing

What is Investing?

Investing is a very exhaustive subject. It means different things to different people. Life is all about doing something to reap benefits in the future. In this sense, we are all in the investing game.

People invest in:

  • Education, to ensure job security and career growth.
  • Health by going to gym regularly and eating a balance diet in their time.
  • Assets like real estate, shares in listed companies, commodities like gold and silver for their or their children needs.

Therefore, we have a lot of people doing different things in the name of investing. This makes the subject of investing very complex.

Investment Products

Investment products come in the form of stocks, bonds, mutual funds, real estate, metals, insurance, commodities, etc. People choose different products depending on their need and the knowledge. Below are the some of the products and their characteristics. Each of them is designed to do something different.

  • Stocks offers capital appreciation and dividends
  • Bonds are lot safer than stocks and offer a safer return on the amount invested.
  • Mutual funds are considered as less risky and professionally managed.
  • Investment in real estate and could be for capital appreciation or earning rent
  • Insurance is used as a security
  • Precious metals like gold and silver appreciate over time and are hedge against uncertainties.

Different people have different needs and different investment goals, and they use different investment vehicles like above.

Investment Procedures

Investment procedures are nothing but techniques or methods for dealing in various investment products.

  • Long: Buying an investment product and holding it for long periods
  • Short: Selling an investment product and then buying it
  • Trading: Buying and selling of an investment product

In addition to the above procedures, there are other investment procedures like Futures and Options. These are mainly used to speculate and hedge in the form of call options, put options and futures.

Investor Classification

Investors are classified by the products they use, and the procedures adopted by them.

  • A stock trader is one who is involved in stock trading.
  • A long-term investor uses the stock and the procedure of buying and holding it long.
  • A short seller uses the same stock and the procedure of selling and then buying it back.
  • A real estate speculator uses the product real estate and adopts the procedure of speculation.
  • A commodities future trader adopts the procedure of the futures market to trade in commodities.
  • A stock option trader adopts the procedure of hedging in the product of stocks.
  • A day trader uses the product stocks and the procedure of speculation.

Investing is a plan, and each plan is different

One needs to have a clear picture of his financials before making an investment plan. Investment plans differ from person to person depending upon their age, gender, size of the family, aspirations, goals, etc. For example, a young person in his mid-20’s who just started earning, stocks and real estate could be the preferred vehicle as he is starting his life and his risk-taking ability is much more. For a retired person with 60 plus years, bonds could be the dominant vehicle as safety is more important at his age. For a family person with daughter and son, stocks, real estate, and gold could be the preferred option for their kids’ education and daughter’s marriage.

Investment planning is a continuous process. All we need is some discipline to stay the long-term course and patience to achieve the desired outcome.

Foot Notes : Stocks to Riches book by Late Parag Parikh Sir