What is investing?
In everyday life, we often refer to investing as putting time or effort that can give long-term benefits such as education. When we talk about investing from a financial perspective, we’re more concerned with investing money, with the expectation of generating an income.
Investing is empowering
Investing’s long-term benefits may place you on the path to the lifestyle you want to live. For most investors, growing their investments and savings isn’t about getting wealthy quickly. It's about having financially secure and option to choose the life they want to lead. To put them in power.
Word of the day: Compounding
The process that occurs when you let the returns from your investment build up and be re-invested, so that you are earning returns on your returns. This causes an investment to exponentially increase in value, due to the return earned on both the original investment and its accumulated returns.
Compounding is most used in the phrase, Compounding Returns.
Types of investments:
Shares
One of the most well-known types of investments, are shares. Put simply, when you buy a share, you are acquiring a small piece of ownership in a company.
You may have also heard shares referred to as stocks, or equities.
As you own part of the company, you are also entitled to part of the earnings of that company. Profitable companies may therefore pay dividends, which is a way of distributing the earnings of the company to its shareholders. Most companies pay a large proportion of their earnings out in dividends.
You can purchase shares through a stock market, which is essentially a one big auction house where buyers and sellers list their asking buying and selling price, and when agreed upon, pass on ownership of shares. In Malaysia, this is the Bursa Malaysia.
Unit Trusts
Unit Trusts are a form of collective investment that allows investors with similar investment goals to pool their money to be invested in a portfolio of assets.
A fund manager then invests the pooled money in a portfolio which may include many asset classes such as cash, bonds, shares, properties and commodities.
Unit holders do not own the assets in the portfolio directly. Ownership of the fund is divided into units. As the fund increases or decreases in value, the value of each unit increases or decreases accordingly. The number of units held depends on the amount of money invested and the purchase price per unit at the time of investment.
One of the advantages of investing in unit trust funds is that for a low cost, they give you exposure to many different companies, diversifying your investment. We’ll talk more about the importance of diversification later in this series.
Cash
Cash is what you keep in your bank account. It represents the low risk but low reward option of the investment world.
When we talk about cash as investments, we focus on high profit rate savings accounts and fixed deposits. Fixed deposits are bank accounts where you cannot touch your cash for a specified number of months and usually receive a higher profit rate.
The advantage of keeping money in cash is that it provides certainty that you will get your money back when you need it. However, this comes at the cost of low yields, which can be very low. Currently, we are living in a low-interest rate environment, with most of the profit earned from cash investments is losing out to the rising of living cost.
Property
Unlike the above investments, property is a physical thing that you can see and touch. Demand and supply for property is the main driver of its prices. There are many factors which influence the demand for property, but location is the main one.
