If you want to create wealth over time, you need to learn how to make your money grow. Investing is the best way to do that.
At its most basic, investing involves putting money in an asset and earning a financial return from it over time. This future return is what helps you achieve your financial goals.
How investing makes money
One way investing works is through the profits earned from capital gains and appreciation.
When you buy a stock at a low price and sell it at a higher price, the return on your investment is called a capital gain. You make money when you realise your capital gains i.e. sell your investments for a profit.
When your asset gains in value after you’ve purchased it, that’s called appreciation. For instance, the price of a stock might appreciate when the company announces the launch of a new product. This raises the stock price as more investors buy the stock.
Earning income through dividends
Investing also works when you buy and hold assets that generate income or dividends. Real estate investment trusts (REITs) and some stocks pay dividends. The goal is to hold these assets long-term and profit from the dividends received. Over time, you may even be able to live off your dividends and achieve financial independence.
Investing isn’t as complicated as it seems. Now that you know how it works, let’s understand what you can invest in.
The main investment types to know
There are mainly four asset types you can invest in: stocks, bonds, real estate and commodities. You can also buy funds like exchange traded funds (ETFs) to invest in hundreds of these individual assets at once.
When you buy stocks (also known as equities), you get to own a small piece of that particular company and participate in its successes (or failures). Stocks have historically offered higher returns over the long term but they are not without risk. The company you’ve invested in could go out of business for example. This is why diversifying – owning multiple stocks instead of picking just one – is so important.
Also known as fixed income, bonds are like a loan you give the bond issuer. You will receive interest payments at regular intervals and on the maturity date of your bond, get your principal back. Bond issuers can be companies (corporate bonds) or governments (government bonds). Generally, bonds hold lower risk but they also yield relatively lower returns. Because their prices don’t usually move in tandem with stock prices, they are usually added to a stock portfolio to enhance diversification.
You can invest in real estate by buying a home, building or piece of land. You profit when your asset appreciates, or when you collect rental income on your property. However, buying a physical property involves a large initial capital outlay. This is why many investors turn to REITs. They get to earn steady income in the form of dividends but without the cost and hassle of maintaining a physical property.
Commodities are generally energy and agricultural products, as well as metals like gold and silver. Some of the more common ways of investing in them are through commodity ETFs, or by owning shares of commodity companies.
ETFs are not an asset class per se. Rather, they are funds that trade on a stock exchange and seek to replicate the performance of a benchmark index. An example would be the Standard & Poor’s 500 index (S&P 500) which tracks the performance of 500 large-cap US stocks. Additionally, ETFs typically hold the same proportion of assets as its index. This diversification makes them less risky than individual investments.
An easy way to get started
Now that you’re covered on the basics, it’s time to make your money work for you. However, investing on your own successfully requires time and effort to understand the various asset types and identify what to invest in.
If you want an easier way to invest, Syfe offers ready-made portfolios across all these asset classes. Explore our three portfolio types here or speak with our wealth experts to find out which portfolio best fits your goals.