Investing: When and how to start?

Investing can seem intimidating and overly technical if you are unfamiliar with it. It is complicated
and seems like a black box, like how do you even buy a stock? Investing may not be the easiest thing
but it isn’t the hardest and with a good understanding of the basics and some research, you can get
started.

But wait, why should you invest at all? Investing can be risky and difficult and you could lose your
hard-earned money. The most conservative thing to do with your money would be to deposit it in a
bank with a small interest rate. This may seem risk free but really, you would be losing money
because of “inflation”. Inflation means that every year goods and commodities cost a little bit more
than the preceding one. If the rate of interest offered by the bank is lower than the rise in cost, you
are effectively losing money. To counter this, the obvious way is to find a bank with higher rate of
interest, only that doesn’t happen. Investing in the market is somewhat like the hypothetical bank
that actually allows your money to make money.

One of the most common places to invest in is the stock market. Stocks are small fractions of a
company that it sells to the general public. When you buy a stock, you own a small part of a
company. Usually when companies earn a profit, they sometimes issue a dividend to the share-
holders which is a percentage of the real value of the stock that you own. This is one way you can
make money from shares. These used as incentives to get more people to invest in their companies.
Companies use your money to increase production, innovate new products and increase the wages
of their workers. Selling shares in the stock market is beneficial for companies as well. It’s better
than taking loans which come with several terms and conditions and require collateral, and investing
on your own as then there is no limit to how much you can lose if the company doesn’t do well.
Investing in the directly in equity shares or the open share market is difficult. You need to assess
which companies have potential for growth, read their balance sheets and stock statements and so
much more, all of which requires a fair amount skill and research, so its probably not the best way to
start as a beginner. In addition, it is probably not a good idea to buy shares of just one company,
even if it has done well in the past. The past is not a reliable indicator of the future performance and
with so many new technologies coming in each day, you never know when one company might go
out of business.

An easier way to start is to invest in mutual funds. Here a group of people(investors) pool their
money and use professionals to invest their money who charge a fee for the same. They are safer
and the work is done by experts so it takes the stress of off you. Another way is to invest in index
funds. Let’s break it down: an index is an index of the stock market, for eg, the Nifty 50 in India
which is an index of the largest 50 companies of India or the S&P500 in the USA which is an index of
the 500 biggest companies in the USA. When you invest in an index fund, you invest in all the
companies of that index, which means that you haven’t put all your eggs in one basket and as the
value of the index grows, your investments grow as well. Also, these funds have extremely low fees
as there isn’t an actual person doing research, just a computer algorithm that directly allocate your
money according to the components of the index.

Now that you know a little about investing, you may wonder when you should start. Probably as
soon as you can. Investing even a little money every month can pay handsomely in the long term and
the earlier you start, more is your potential for taking on high risk high return investments. When
you are younger you probably don’t have too many responsibilities and dependents and you can
invest for a longer duration of time. It is more important now then ever to start early. Due to
advancements in medicine, the average life expectancy has gone up significantly but the retirement
age has remained constant and the concept of pensions, even in government offices is redundant.
To summarize, you need to save money to survive when your active source of income dries up. Your
future self is just as important as your present self.

Investing, done with a little bit of understanding and research can results in wonderful returns over
time and can help you have financial security. Don’t invest to be rich, do it so that you can make the
choices that are the most liberating and fulfilling for you.