So you've decided to start investing. Congratulations! Whether you're just starting out on your own, in the middle of your career, approaching retirement age, or in the midst of your golden years, this means you've begun to think about your financial future, and how you might prudently manage your capital so that it can work for you.
Nobody starts out an expert, and even the best investors in the world were once sitting where you are.
Let's start with two basic questions:
1. Where should you begin?
2. How do you begin?
Those two inquiries might seem daunting, especially if you've encountered the array of intimidating investing terms — like price to earnings ratio (p/e ratio), market capitalization, and return on equity. But getting started with investing isn't as scary as it might seem.
The First Investing Step Is Figuring Out Which Types of Assets You Want to Own
Let's start with this basic truth: At its core, investing is about laying out money today with the expectation of getting more money back in the future — which, accounting for time, adjusting for risk, and factoring in inflation, results in a satisfactory compound annual growth rate, particularly as compared to standards considered a "good" investment.
That's really it; the heart of the matter. You lay out cash or assets now, in the hope of more cash or assets returning to you tomorrow, or next year, or next decade.
Productive assets are investments that internally throw off surplus money from some sort of activity. For example, if you buy a painting, it isn't a productive asset. One hundred years from now, you'll still only own the painting, which may or may not be worth more or less money. (You might, however, be able to convert it into a quasi-productive asset by opening a museum and charging admission to see it.) On the other hand, if you buy an apartment building, you'll not only have the building, but all of the cash it produces from rent and service income over that century. Even if the building were destroyed after a decade, you still have the cash flow from ten years of operation — which you could have used to support your lifestyle, given to charity, or reinvested into other opportunities.
Each type of productive asset has its own pros and cons, unique quirks, legal traditions, tax rules, and other relevant details. Broadly speaking, investments in productive assets can be divided into a handful of major categories. Let's walk through the three most common kinds of investments: Stocks, bonds, and real estate.
Nobody starts out an expert, and even the best investors in the world were once sitting where you are.
Let's start with two basic questions:
1. Where should you begin?
2. How do you begin?
Those two inquiries might seem daunting, especially if you've encountered the array of intimidating investing terms — like price to earnings ratio (p/e ratio), market capitalization, and return on equity. But getting started with investing isn't as scary as it might seem.
The First Investing Step Is Figuring Out Which Types of Assets You Want to Own
Let's start with this basic truth: At its core, investing is about laying out money today with the expectation of getting more money back in the future — which, accounting for time, adjusting for risk, and factoring in inflation, results in a satisfactory compound annual growth rate, particularly as compared to standards considered a "good" investment.
That's really it; the heart of the matter. You lay out cash or assets now, in the hope of more cash or assets returning to you tomorrow, or next year, or next decade.
Productive assets are investments that internally throw off surplus money from some sort of activity. For example, if you buy a painting, it isn't a productive asset. One hundred years from now, you'll still only own the painting, which may or may not be worth more or less money. (You might, however, be able to convert it into a quasi-productive asset by opening a museum and charging admission to see it.) On the other hand, if you buy an apartment building, you'll not only have the building, but all of the cash it produces from rent and service income over that century. Even if the building were destroyed after a decade, you still have the cash flow from ten years of operation — which you could have used to support your lifestyle, given to charity, or reinvested into other opportunities.
Each type of productive asset has its own pros and cons, unique quirks, legal traditions, tax rules, and other relevant details. Broadly speaking, investments in productive assets can be divided into a handful of major categories. Let's walk through the three most common kinds of investments: Stocks, bonds, and real estate.
Investing in Stocks
When people talk about investing in stocks, they usually mean investing in common stock, which is another way to describe business ownership, or business equity. When you own equity in a business, you are entitled to a share of the profit or losses generated by that company's operating activity. On an aggregate basis, equities have historically been the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.
At the risk of oversimplifying, I like to think of business equity investments as coming in one of two flavors — privately held and publicly traded.
When started from scratch, they can be a high-risk, high-reward proposition for the entrepreneur. You come up with an idea, you establish a business, you run that business so your expenses are less than your revenues, and you grow it over time, making sure you are not only being well-compensated for your time but that your capital, too, is being fairly treated by enjoying a good return in excess of what you could earn from a passive investment. Though entrepreneurship is not easy, owning a good business can put food on your table, send your children to college, pay for your medical expenses, and allow you to retire in comfort.
Investing in Publicly Traded Businesses: Private businesses sometimes sell part of themselves to outside investors, in a process known as an Initial Public Offering, or IPO. When this happens, anyone can buy shares and become an owner.
The types of publicly traded stocks you own may differ based on a number of factors. For example, if you are the type of person that likes companies that are stable and gush cash flow for owners, you are probably going to be drawn to blue-chip stocks, and may even have an affinity for dividend investing, dividend growth investing, and value investing.
Read Full Article Here: Beginner's Investing Guide to Make Your Money Work for You
