The idea of investing is to increase your assets through smart investments. Would you like to start investing in the near future, but do you not know exactly how investing works and what it entails? And would you like to learn how to invest better?
Then you have come to the right place. In this article, we will explain what investing is, how it works and in which financial products you can invest. Good luck!
What is investing?
Investing is basically buying a financial product in the hope that its value will increase. If the value increases and you sell the product after a certain period of time, you will make profit.
Of course, if the value of the product falls, you may unfortunately lose money. That is why it is important that you choose a smart way to invest: achieving a good return with as little risk to your capital as possible.
This risk will of course never be completely eliminated, but it is important that the risk is manageable. You can limit the risk of investing by, for example, reading up on the subject, thinking about why you want to invest and looking at which way of investing suits you the best.
First of all, it is a good idea to consider your motives for investing your assets. Most people who invest, do this simply because it is more attractive than putting the assets in a savings account. This is because you only receive a small percentage interest on your assets in a savings account. By investing your assets in the long term and by spreading the risks, you can achieve a higher return in a relatively safe manner.
Investing is also quite attractive if you are an entrepreneur. As an entrepreneur, you will only be dependent on your state pension when you retire. Unlike someone in employment, you cannot count on a pension fund. It is therefore wise to invest part of your assets, so that you do not have to worry about money during your retirement.
Finally, there is of course a group that dreams of financial independence through investing. Financial independence means that by investing, your income will exceed your expenses and you will no longer have to work to support yourself.
The latter is of course an ideal situation which – unfortunately – is not so easy to achieve. There are theories that claim this can be achieved by earning four per cent of your capital each year. Entrepreneur Pim Verlaan talks about this in his podcast ‘Young Investing’, for example. But even if this is not your goal or you do not achieve it, investing is of course a great way to grow your capital.
How does investing work?
There are different ways to invest your money. They differ in the type of financial product you invest in. Below you can read more about the different ways of investing and decide to invest in the way that suits you best.
Investing in shares
One of the best known forms of investing is buying and selling shares. By buying a share, you actually acquire a small part of (the capital of) the company. If this company then does well in the market and its market value increases, the value of your share will also increase. If you sell the share when its value is higher than the amount that you bought it for, you make a profit!
It is also possible, when owning shares, that you are paid a dividend as a shareholder. This is the part of the profit that is paid to the shareholders. Whether a dividend is paid depends on whether the company in which you have shares chooses to do so. Also, dividends are only paid when the company makes a profit.
What is important to know, however, is that before you start investing in shares, you must carefully research the company in which you want to buy shares. It takes time and effort to actively follow the development of a company to ensure that you buy or sell your shares at the right time.Many aspects can influence the value of your shares, such as developments within the market or the currency in which you buy the shares. For example, think of shares in Apple, which could rise or fall depending on whether a new iPhone comes out and whether it is well reviewed by customers.
Investing in bonds
Another well-known form of investing is investing in bonds. Bonds are actually debt securities of a company or the government that lends money from you. During the term of this loan, you will receive interest on the lent amount, which will be paid back to you at the end of the loan.
But why invest in bonds, when you can also choose another way of investing? Investing in bonds is a reasonably safe way of investing and brings with it a high degree of security. The only risk associated with investing in bonds is that the lending institution may go bankrupt. But even then, you still have the same rights as a ‘normal’ creditor in case of division of the property.
Investing in a fund
You can also invest your assets in an investment fund or index fund. An investment fund is a collection of the assets of various investors, which are actively managed and invested by experts. Therefore, these are also called actively managed investment funds.
There are various types of investment funds from which you can choose. You can choose an equity fund, a bond fund, a real estate fund or a mixed fund. With a mixed fund, your assets are not only invested in shares, bonds or real estate by the experts, but you leave the choice of what they want to invest in to them.
Besides actively managed investment funds, there are also passively managed investment funds. These are also called index funds. Unlike investment funds, the aim of index funds is not to achieve a better return than the index, but to follow the index.
The advantage of investment funds is that you can invest with a small capital and that your risk is spread. With investment funds, your assets are also managed by fund managers who have a lot of knowledge about investing.
The only disadvantage is that, because these fund managers have to be paid, this entails higher costs then other types of investing. With index funds, no analysts and experts are needed to invest your assets. So there is no higher cost but there is less expertise involved.
Investing in ETFs
ETF stands for Exchange Traded Funds. These are automatically generated groups of shares that you buy and, as you can see, this is somewhat similar to a mixed fund. Buying ETFs is a relatively new way of investing, because it originated from technological developments that make it possible to generate these groups of shares automatically.
Despite the fact that this is automated, you can still specify criteria on the basis of which your assets are invested. The advantage of that is that you do not need to have much knowledge of the companies in which you are going to invest. The companies are chosen by the algorithm!
The advantages of ETFs are the same as with investing in a fund: your risk is spread, you can achieve a reasonable return and you can invest with just a small amount of money.
Investing in real estate
A fairly old form of investing, on the other hand, is investing in property. When you invest in property, you invest in real estate: buildings with the accompanying land. These may be houses, offices, shops, hotels or other buildings.
The profit you make from investing in property often consists of monthly rent that you get from the person who rents the space. This is also called passive income.
You can of course invest in real estate by buying real estate, but when we talk about investing, it is actually always through a real estate fund. So this is investing in real estate through a mutual fund mentioned above, whereby you spread your risks and share in the returns of the fund.
Investing in crypto
Finally, one of the newest ways of online investing is investing in cryptocurrencies. Cryptocurrencies are online currencies which represent a certain value. Because the price of these crypto currencies changes, you can profit by buying and selling them.
Investing in crypto is easily done online, through online platforms. There are various platforms of this kind: you can choose between a broker, an exchange or a peer-to-peer platform.
If you want to know more about the different ways of investing in crypto, you can find this in our article about cryptocurrencies[LINK]. In the article we also discuss the best known crypto currency, bitcoin, and the advantages of bitcoin compared to other crypto currencies (altcoins).
Starting to invest
By now you should have a clear picture of the different financial products you can invest in. By gaining sufficient knowledge, you can now start investing and grow your wealth
If you want to choose for safe investing, then investment funds and ETFs are ideal to start with. As mentioned before, these financial products make it possible to invest with a relatively small capital. Also, these forms of investing are low-threshold, they provide a spread risk and you can still achieve a reasonable return.
But even if you find another form of investing more interesting, it is still a better alternative than leaving your assets in your savings account. If you make sure you are well informed and only invest with the money you have ‘left’, you will see that this provides a nicer amount than you will achieve through the interest on your savings account.
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