So, what is Investing?
American business magnate Warren Buffet calls investing “the process of laying out money now to receive more money in the future.”
Investing, therefore, is the act of putting money into something today and using that thing to generate profit tomorrow, or further down the line. With that definition in mind, an investment can basically be anything you’ve spent money on, but also rely on to earn money. This could be a car you use for deliveries, or work boots for the factory.
In this article, investments, such as company shares and unlisted investments, will be discussed. For the first-time investor, these might all seem a little intimidating. However, with a little math, insight and a bit of luck, investing can be a viable source of long-term profit.
Do I Really Need It?
Investing your money is a great way to “diversify your revenue stream”, which is simply multiplying the ways you earn income. The right investment can double, or even triple your initial capital.
Investments are a patient man’s game. While it is possible to make quick money through trading, there are wiser applications of investments, such as real estate, or corporate bonds. Those options may take time before they generate revenue, but the payoffs are bigger and more secure and are less stressful to manage.
Figure Out What Sort of Investment You Want
Listing down all the possible types of investments would take a considerable amount of time, so let’s focus on the most common ones.
The Australian Securities & Investments Commission, or the ASIC, lists the three most common investments in Australia. These are shares, unlisted investments and managed funds.
Shares are the most common type of investment, and are probably the ones that sound most familiar to casual observers of finance. Investing in shares means that you are buying a part of a company, and your profit (or “returns”) comes from any capital growth or dividends if your share increases in value over time. To simplify further: if the company you invested in makes money, then your share becomes more valuable. Once this happens, you can sell your share for a higher price than when you initially bought it, thus making profit.
An unlisted investment, or debenture, is when an investor loans money to a company or organisation, and in return, that company or organisation pays off the loan with a fixed rate of interest. This loan is repaid within a set amount of time. Usually, debenture investments are used by companies or entities as a loan to other borrowers, usually people looking for mortgage financing or debt capital funding.
This makes it riskier than investing in shares, which is why the ASIC heavily regulates debentures and other unlisted investments.
Managed funds, or managed investment schemes, are created when your capital is pooled together with other investors’ money and used to buy shares, or some other kind of investment. Investors then earn based on how much their initial capital was, gaining returns relative to the percentage of the pool that they own.
Because managed investment schemes usually have multiple investors, it’s heavily regulated and controlled by a constitution, and is managed on a day-to-day basis by a professional investment manager.
Other investment options exist, from indices and warrants, to real estate. Do your research on the type of investment you want, and consult with a professional.
Generally, investments are things that generate revenue in the long-term. While there are low-risk investment options available that earn you a decent profit quickly, other options such as managed funds have higher risks with bigger profit. The latter is more often the investment of choice for people who are willing to wait for their initial capital to grow.
It’s generally never a good idea to put all your eggs in one basket, and this is especially true for investing. Having multiple investments in place means that, if one investment fails, you’ll still have other sources of profit.
One example would be to buy shares of a company, and then using the profit from those to purchase real estate. Your real estate property then generates money, either in the form of rent or the proceeds from a sale, which you can then use as a contribution to a managed fund, the profit of which you can use to buy stocks, or more company shares. Thus, an investment cycle is created.
The concept of investing is simple. However, there are a lot of intricate investment types, processes and laws that govern investing. Beforehand, always do your research, and consult professionals.