Investing For Beginners: What is Investing

Investing for beginners

The end product of investing has captivated many people. In some cases it is presented as material gain, a luxury lifestyle or the freedom to live as one pleases.

What is investing and how can you start investing so with time, you can also see the proceeds from your investing to spend and live as you please? 

Key Takeaways

Unrealistic expectations are another problem that many new investors face because we are conditioned to expect ‘magic’ or quick returns. Investing however is a process and like any process, it requires work and attention. 

There are situations where a good bet pays off big time and you should read our review of the Psychology of Money to better understand the role of luck and skill when it comes to investing. One or a couple strokes of luck does not make you a good investor.

This article introduces some of the fundamental aspects of investing for beginners and how you can learn to make decisions that will benefit you now and in future.

There are many books out there on the topic of investing. Some of these approach the topic from an investing style point of view or market psychology or even how the market works. 

There is a lesson to learn from each book we have featured here that will help you on your investing journey. We especially recommend the following books first. The Psychology of Money, The Little Book of Common Sense Investing and The Simple Path to Wealth.

What is Investing

In a broad sense, investing is the act of dedicating resources and capital to an endeavour, expecting to get dividends in the way of value and capital gains.

Looking at it from a non financial perspective is unusual but in reality it is how things work. If you want to have a certain body, you will need to put in the work regardless of how much potential you have. You will need to eat the right things, exercise and change your lifestyle.

Aspiring to become an athlete, actor, physician or anything different from your current state requires consistent and deliberate effort in order to see lasting results.

The end goal may not be monetary or any form of financial gain but there ultimately will be some gain or value at the end of the process or as you progress.

Investing from a financial point of view follows the same principles of dedicating resources which could be time, money or any thing of value into learning about and purchasing financial assets with the expectation of getting a dividend and capital gain at the end of it.

Ib – Investing for Beginners

Dividends are what the asset class pays you for holding it and capital gain is the increase in the price after you sell the asset in future.

Example One

Let us take an example from Real Estate. Over time in your local area, you see changes to the high street. You observe a few of the indicators that the area is improving. There is a better transport service, a new shopping mall around the corner and an Olympics planned in the area for example.

You purchase a house in the area with the expectation that once the shopping mall is complete, the new train lines are set and everything else that makes the area appealing, the value of the homes in the area will increase.

There is a distinction between value and price but for the purpose of this example we will assume the price and value are the same. In reality, they are not.

You purchase a property for £100,000 and spend a further £50,000 on refurbishment. Once you have completed the works, you put the property on rent.

Your property is rented on the market for £1,500 per month and after repaying the mortgage and taxes, you are left with £1,000. That £1,000 left in your pocket, is the dividend you get from owning the property.

Now you decide you will like to sell the property because you have made your money and will like to move to bigger and better things so you sell the property for £300,000.

Comparing the total spend when you bought and refurbished the property which was £150,000, to the new selling price of £300,000, you have made a profit of £150,000. 

This £150,000 value is the capital gain or the increase in the price of the asset class over the period of time you held it for. 

Remember the emphasis here is the principle of investing so we have not discussed taxation or any other aspect that will make this example more realistic.

Example Two

Another example we can use to illustrate investing, is the stock market. 

After carrying out your research, you decide this is the time to invest in the stock market and for simplicity sake, we will stick to stocks – no ETFs, Index Funds or any exotic instruments like derivatives or options.

You decide to purchase 100 shares in Apple and over time, you increase the number of shares you have bought to 500 shares.

While you held these shares, you were paid a dividend because Apple pays dividends although not every company does.

Later on you choose to sell your shares in Apple and they sell for much higher than what you bought them.

What you should realise from these rather simple examples is what happens when we purchase an asset that pays dividends. This asset can also go up in value from the time we buy to when we sell it – dividend yield and capital gains.

Final Thoughts

Looking up the term investing for beginners on any social medial platform or on the web will return a large amount of results. We have come to understand many of these results are irrelevant, incomplete and confusing for new investors.

Reading motivational quotes juxtaposed with fast cars or fancy locations will not give you wealth – I know, even manifesting has its limits. If you want to have something you have never had before, you need to do something you have not done before.

The first step when it comes to investing is to have the right mindset so you have realistic expectations, avoid scammers and understand that investing is a process. You will make mistakes and hopefully learn from them as part of the process.

Investing is the process of creating wealth.