A Quick Guide to the Basics of Investing
In an economy where prices are inflating rapidly, holding money in a bank account means that money is losing value as prices rise. It’s no wonder many people look to investment as a way to increase their personal worth.
Combine the eye-glazing jargon with the machismo often found in investment communities, and it’s no wonder women are half as likely to invest as men, according to a study by NFU Mutual. Reports such as one from the Financial Conduct Authority we cited last year also clearly show a relative lack of financial literacy and a higher rate of financial precarity among young women and girls.
To combat that, let’s consider some general concepts and advice around the topic and a couple of specific investment types with which to get started.
Risk and investment
One perfectly understandable impulse that girls and young women have is risk aversion. Some will question whether investment is just a fancy version of gambling. In both cases, you’re putting money forward, hoping for a more significant return with incomplete information. But with gambling, you’re very often working with deliberately limited knowledge and a house that wins over the long term. Investment should generate bigger returns than the initial buy-in over time — especially as you gain information and expertise. Using an algorithmic ‘robo-investor’ takes the work out of learning, and is a valid option. That doesn’t mean you can’t still lose in a bad year, such as 2008 or 2020, nor that some investments don’t come with a higher risk attached; which is why the old phrase about eggs and baskets (keeping a ‘diverse portfolio’) applies. It’s also wise to pay off debts first, and observe the adage ‘don’t invest more than you can afford to lose.’
How much can an investor expect to make?
Looking at the stock market as an example, the average return of the Standard and Poor 500 index of stocks, which tracks a collection of 500 large company shares, is around 10%. While 10% is a good target, achieving any return above ‘normal’ inflation — 3 to 4% — is a positive result. There are ways to make money even in a ‘stagflating’ economy — a combination of decreased currency spending power (inflation) and decreasing value of many assets, including company shares (stagnation) — but many choose to purchase a ‘safer’ commodity like gold which tends to hold value.
Other types of investment in different markets are considered to come with greater or lesser risk and reward. Here are two to think about.
The UK housing market has steadily increased over time. Getting on the ‘property ladder,’ and upselling said property — a more tangible type of asset than shares — often by renovating or adding extensions to it is a popular way of investing with high up-front costs. But just waiting alone could substantially increase some areas of the country.
We’ve touched on the value of currencies, and often the easiest way to measure that is pairs of currencies such as dollar-pound or euro-yen (commodities like tonnes of wheat or barrels of oil are also compared against currencies). Trading on the projected difference between two currencies in a pair is a huge global market, seeing a volume of trillions of dollars a day. This guide to the pros and cons of forex trading by FXCM is a handy reference for beginners. On the one hand, for example, the modern trader has options in setting certain parameters of the trade, but putting down life savings would be a bad idea in a market known for volatility. Moreover, the practice of borrowing (‘leverage’) in order to enhance gains in capital also carries the risk of magnifying losses.
Ultimately, investing is all about mitigating risk and maximising reward. The chances of an investment may seem less daunting than holding cash. In addition, the problem of not having many eggs to put in the baskets is reduced by easier ways to dip a toe in, such as fractional shares, and tools such as leverage.
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