What The Average Person Does Not Understand About Investing (1)

Most people have heard that to be rich (legitimately), you have to invest. More often than not, the questions the average person will ask are: what do I invest in? How do I invest? How much should I invest? When do I invest? And lots more…

The purpose of this article is to break down the basic principles of investing in the most practical way for a fellow Nigerian that will enable anyone to take action.

Knowledge is key. Even if you don’t have the money at hand to invest today, you can take note of this information for when it will be useful.

So let’s dive in. First, some definition: What’s investing? Without a dictionary, almost anyone will agree with this conventional wisdom that “investing is putting money in a venture with the expectations of returns (or gains) for a particular period.”

If you agree with this definition, it means to invest will involve your money, a venture (business in any form) and time.

Now to answer some questions:

How much should I invest? The short answer here is to invest a percentage of your income consistently. No matter the size of your income, you can start to put a little away to invest. Anything from 10-30% is a good number to start with.

When should I invest? The quick answer here is every time. If you’re a salary earner, once you get your salary alert. If you’re a trader, everyday you make a profit. If you’re a business person, at the end of every month when you have tidied your books for the month.

Even though this article is about investing, it’s good to note that budgeting is a key habit towards sustainable investing. Budgeting will help to put your income, expenses, savings and investments in good order. It will help your planning. And planning is what prevents failure.

What should I invest in? This is the key part. Different financial advisors will counsel you in different ways. They will point you towards different directions. Friends and families will pull you to different paths all in the name of massive gains and with less thought toward security and stability.

In the end, your eventual financial success is your absolute responsibility. You need to know your options and make your decision on every investment. No one will make it for you. A quick note, if you follow the crowd too much, you won’t be in charge of your own decisions and the results, either success or failure.

There are different things to invest in, commonly called instruments of investments. I will focus on the markets that you can buy these instruments and then break it down further: private business, capital market and money market.

Investing in a Private Business: This is when you put money into a business that you own or owned by a friend for a return after a particular period. This can happen in diverse forms. You can invest in a farm and get returns when the farm’s products are sold. You can invest in a building and rent it out for a fee. You can invest in a business and get paid monthly depending on how the business generates revenue. You can invest in an idea until the idea becomes a viable business and so on. The risk here is high and your capital is often not secured.

Investing in the capital market. This is when you buy a share of a publicly-traded company on the stock exchange. In this market, you make money by getting dividends as defined by the company or when you sell your share at a price higher than when you bought the stock. The risk here is medium and your capital is fairly secure.

Investing in the money market. This is when you put your money into the banking system in the form of fixed deposits, treasury bills, and bonds. The risk is low and your capital is secure to a large extent.

No investment guarantees your capital. Every investment carries risk and this is why it’s important to ask as many questions as possible and get the answers before parting with your money on any investment medium, no matter the promised returns.

I’m sure many people will want to know about other investments like forex trading and the likes. I won’t count Forex trading as an investment. As the name suggests, it’s Foreign Exchange trading. It relies on the different currencies of the world. Just as any petty trader will go to the open market to sell their wares, forex traders are on their computer systems buying and selling currencies per second. And with any other trading, you win some, you learn some. We will try and shed more light on Forex trading in subsequent articles.

A key path to understanding financial investments is asking questions, no matter how silly. Do not hesitate to ask questions that will help you understand the effect of your decisions.

Read the concluding part of the article here.

Disclaimer: This article does not constitute financial advice. Do your research and consult your financial advisor before you make any investment decision.

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