We all work hard for money. We put in the hours at our jobs and get a salary. We spend most of our waking hours
in an endeavor to earn money. Investing is something similar – except that instead of (or apart from) us working
for money, we make the money that we have work for us.
Investing as per Wikipedia
Investment is putting money into something with the expectation of gain, that upon thorough analysis, has a
high degree of security for the principal amount, as well as security of return, within an expected period of
time.
What does investing mean?
Simply put, investing is putting to use money today so that one will get even more later. How much more one gains,
or how much later one gets the additional money differs from one investing mechanism to another. The reliability of
return of the original capital as well as the additional interest (or capital appreciation) differs among different
investment options.
Other ways of looking at investing:
- It is a way of making sure that the buying power of the money we have keeps pace with increase in cost of
goods and services. - It is a way to make sure that we have a better tomorrow.
- It is a way we can ensure that we are able to sustain today’s lifestyle in the years to come.
- It is a way to make sure that we meet financial goals (like buying a car or home).
- It is a way to ensure that children get the education they need.
- It is a way to get rich.
There are some factors of extreme importance that need to be considered during investing:
- The minimum quantum of capital one needs to commit
- The duration for which one needs to commit the capital invested
- How much more money one gets in the process
- The reliability of getting back the money
- Taxable nature of the excess money one gets
The whole world of investing pretty much rests in these factors. The smartness of an investor lies in choosing a
financial instrument that offers a good combination of these factors.
Some financial instruments, like bonds, by their very nature have a fixed duration.
When should I get started with investing?
You need to get started with investing as soon as possible. The sooner you start, the better it is. In fact
today is a good day to start exploring your investment options. At the very least, today is a good day to start
your learning or education with regards to investing.
It really does not matter how much you start capital you have. You can get started with investing in stocks for
as little as $250. There are many companies that allow you to buy shares directly from them.
These programs are specifically tailored for an individual investor who wants to get started with investing for
as little as possible. The additional advantage of direct stock purchase plan is that typically they are very cost
efficient.
For instance take the direct stock investment program of Procter and Gamble.
You can become a P&G shareholder with a minimum initial investment of $250.00. This investment can be
made by check, money order or an automatic investment directly from your checking or savings account.Once a shareholder, the minimum investment into the Plan is $50.00.
What if you don’t have $250 to begin with? What if you are a student and want to invest your pocket money? Well,
you just need to look for investment options that can be done for less.
For instance, one can start off investing in MDU Direct Stock Purchase plan for as little as $25 per month:
Initial Investment/Enrollment. If you are not a registered owner, you may purchase common stock through an
initial investment of at least $250 or authorize automatic monthly withdrawals from your bank account of at
least $25 per month for a minimum of ten consecutive months.
This is not an recommendation to invest in Procter & Gamble or MDU. The main point here is that apparent
lack of funds is really not a problem when it comes to investing. One can start of with whatever one has available
at hand. In fact it is best if one starts early and small. Investing skills take time to develop and mature and
starting early definitely helps in getting to understand the process quicker.
One can make all the mistakes when one has little capital and by the time one manages a big account, one would
have become wiser, smarter and perhaps even an expert in investing.
What is the difference between saving and investing?
Saving, as is traditionally defined and understood, is focused on spending less than one earns. Thus one is left
with a surplus – one has saved money. The goal of saving is to create a surplus by figuring out how to get more by
spending less. It typically involves curtailing unnecessary expenditure. One creates and follows a budget plan in
the hope of managing expenses properly. One has income; one spends wisely; one saves.
Saving is the beginning of investing. One can only invest what one has saved (of course, one can use other
people’s money; borrow and invest, but that is not always a smart idea). Saving and investing go hand in hand. The
more money one can save, the more money one can put to productive use – that is invest.
The key difference between saving vs investing is the emphasis on rate of return while investing. One can save
money and keep it safe as cash in a box. It would be saving for sure, but the money would not grow. In fact time
will slowly erode the buying power of money held as cash.
Investing Vs Gambling/Speculation
While the end result hoped by both and investor and speculator/gambler is the same (ie. make more money than
using money), the method and analysis used by them differ a lot.
Investment Vs Speculation
Most investors participating in the stock market are actually speculators operating under the garb on investing.
Benjamin Graham makes the difference between investment and speculation very clear:
An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate
return. Operations not meeting these requirements are speculative.
Further more he goes on to say that a good investment also makes for a good speculation.
There is scope for both investment as well as speculation in the stock market. There is absolutely nothing wrong
with speculation as such – as long as one understands it properly and does it intelligently. In fact the more one
gains experience as an investor, the better one’s speculating skills become.
Investing Vs Gambling
Many people think that investing is gambling. Nothing could be further from the truth. Investing is not
gambling. The role of chance or luck is very pronounced in gambling. Sometimes the outcome of the gambling activity
is totally and completely dependent on luck and has no skill involved (eg. slot machines in a casino). There are
other gambling activities where skill plays a role as well (eg. Blackjack or Poker).
The key difference between gambling and investing is how much luck or randomness influences the outcome. While
luck definitely has a role to play in investing, it is much more obvious in gambling. Bottom line – invest
properly; don’t gamble.
Having said that, there are a lot of things investors can learn from gamblers. The risk management rules used by
professional gamblers is among the very best I have ever encountered. Reading books written about gambling can
provide deep insight into the activity of investing.