Analogy to better understand investing

 


Investing can be daunting for those new to this, including getting a lot of concepts used when discussing financial markets.


But don’t worry - reading the basics is easier than it first appears. Here are some super simple analogies that can help you find some key investment terms.





 



Don’t put all your eggs in one basket



When you physically put all the eggs in one basket, you run the risk of dropping the basket, losing them all. Alternatively, you should put some eggs in one basket and some other eggs. Meaning, diversify your investments. Don't just invest in one asset. Imagine you put all your money with difficulty in Bitcoin, and the next day the price drops ...



  



Snowball effect



Compound interest is another concept that is quite difficult to understand. Usually expressed as interest calculated on the initial principal amount, including all interest accrued from the previous deposit or loan period.



If you don’t want to be confused as to what that means, it might be useful to think of a compound interest like a snowball gliding on a ski field - it will build and develop as it rolls.



This is how it works. Imagine you have RM100 with annual interest of 10% compound interest. Your interest at the end of Year 1 is RM10 but the total value is RM110. The following year, the interest is RM11 and you have RM121 in your bank account. We can keep going:



End of Year 3: RM121 + RM12 = RM133; RM12 annual interest is earned

End of Year 4: RM133 + RM13 = RM146; RM13 annual interest is earned

End of Year 5: RM146 + RM15 = RM161; RM15 annual interest is earned

As you can see, with compound interest, the total quickly gathers momentum, like a snowball going down a hill.



 



Planting crops



From the snow to the garden, when compared to the concept of the average Ringgit cost, it is very useful to think of it as planting a plant.



Investment strategy, the average cost of the Ringgit involves a fixed investment over time, for example, RM100 per month, regardless of market conditions. This strategy can be wise because the short-term movements of the market, which can be volatile, are not so important to use this strategy given that it is based on a common investment strategy.



Like the regular care you need to give a plant to make it grow, a consistent Ringgit cost average can be an effective way to make your investment reach its full potential.



  



Collect sea shells



Want to understand why some news can affect the stock market? It's all about perception. And, while it doesn’t look like that at first glance, it’s a bit like collecting sea shells on the beach.



On the beach, there are shells of various colors and there is no reason that one type of shell should be more appreciated by beach visitors than another type. But what if everyone started collecting purple shells, and no one considered another color?



In that case, the value of purple shells tends to go up, although there is no intrinsic change about the shells themselves - it’s all about how they feel.



So, when it comes to the stock market, keep in mind that price movements are often about market anticipation and perception, rather than a change in the underlying company itself.
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