Investing basics
Investing isn’t just a way to grow your money — it’s also a way to secure your financial future. For many people the subject can seem complicated and off-putting, but with the right knowledge and approach, anyone can become an effective investor. That’s why I’ve put together this guide to the basics of investing. It’s a myth that you need a lot of money to start. I’ll show you what to invest small amounts in, so you can understand how this fascinating world works.
I know that deciding what to invest your money in isn’t easy. The flood of different ads and investment offers is enough to give you a headache. So I’ll try to lay out the basics of investing in a way that’s clear and easy to take in. I’ll show you various types of investment — from the safest, through those with an average rate of return, all the way to specialist, high-risk investment solutions. This article is a body of knowledge that will let you step confidently into the world of conscious capital management. Let’s get started!
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What is investing?
Investing is a process in which you put your money into various financial instruments in the hope of making a profit. To put it another way, and in very simple terms, you lend your money to someone else so they can use it in a particular way. In return, they pay you some amount regularly, or promise to give back more than they borrowed.
It may sound complicated, but in reality anyone can learn how to invest on the stock market or in other assets. The basics of investing really are much simpler than they seem at first glance. The key is to understand what to invest in to get the best results. You can choose to invest in gold, real estate, shares or bonds. Think you need a large sum? Not at all! I’ll show you what to invest small amounts in and how to grow your money step by step.
Whether you’re thinking about how to grow your money or wondering what to invest 50,000 in, the key is to take a strategic approach.
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I understand how hard the choice of what to invest your money in can be, given the overwhelming number of options. Investments can span various asset classes, and each has its pros and cons. Investing on the stock market can deliver high returns, but it also comes with greater risk. Investing in property, on the other hand, can be more stable, but it requires more starting capital.
Ultimately, what’s best to invest in depends on your individual preferences and financial goals. Wisely placing your money in different financial instruments, broadening your knowledge and adapting your strategy to changing market conditions are the passes to success in the world of investing.
What to invest in?
So, you’re wondering what to invest the money you worked so hard to earn in? There’s a wealth of options, and the choice depends on your financial goals, risk tolerance and time horizon. I’ll tell you about the classics, such as investing in gold, shares and real estate, but we’ll also go a little beyond the basics of investing to show you some less popular solutions too.
If you’re looking for ways to achieve high rates of return, remember that this comes with greater risk. And when you’re wondering how to start investing, think about learning by putting small amounts into index funds or ETFs. That way you can grow your money gradually, minimising risk, while at the same time learning how financial instruments work.
Advanced investors who understand perfectly well what to invest in, have mastered far more than the basics of investing and have a feel for specific financial instruments, can make specialist investments. This might be funding startups or trading cryptocurrencies. But investments like these require more knowledge and a readiness for bigger swings in value.
Regardless of your experience and risk tolerance, it’s important first to set your investment goals and protective strategies. Choose the instruments that best suit your investor profile, following the principle “invest in what you understand.” Investing is a journey that, with the right plan and patience, can lead to financial freedom.
Hygienic and safe investments
What should you invest your money in if security and certainty matter to you? If you don’t tolerate risk, you don’t have much choice. You’re left with hygienic investments, such as bank deposits and treasury bonds. They are almost risk-free, which means your money will be safe and you can sleep soundly. Bear in mind, though, that your money will sleep soundly too.
It will sleep instead of working, because the rates of return on deposits hover around inflation, beating it by at most 2 percentage points. The lower the risk, the lower the gains. If you want higher gains, you have to accept at least minimal risk — the basics of investing are like maths, non-negotiable.
So, what should you invest your money in to avoid losing it, while still making the effort worthwhile? You have to go beyond hygienic investments. Safe investments include investment funds with an SRRI category of 1 or 2, corporate bonds of the largest companies, as well as investing in gold and silver, or buying property to rent out and handing it over to a specialist company to manage.
An investment just as safe as buying property and handing it over for management is buying shares in large, stable companies that regularly pay a dividend (that is, pay out profits to shareholders). In both cases (property and dividend-paying blue chips) you’re investing for the long term, with the aim of receiving regular passive income (rent or dividends). We mustn’t forget about ETFs tracking the main stock indices. The fact that the stock market rises is an indisputable fact, stemming from the reality that human civilisation is continuously developing. By investing in the main stock indices, you do so with that constant, long-term growth of the global economy in mind.
So, as you can see, there are quite a few ways to grow your money without taking on too much risk along the way.
Investments with an average rate of return
Once you’ve mastered the basics of investing, it’s worth considering instruments with a slightly higher rate of return. It’s a great way to grow your money, combining moderate risk with profit potential. Examples of financial instruments you can add to your portfolio at the start are investment funds and the corporate bonds of other companies.
If you like variety, consider investing in commodities and raw materials, such as oil, copper or grain. You can do this either through an investment fund, an index fund or an ETF. It’s a dynamic market that can deliver interesting returns.
You can also begin investing on the stock market in a safe way, that is, in the shares of companies that make up the main stock indices. They represent well-known and stable firms, which gives a sense of security alongside a moderate rate of return, but it already calls for some experience and familiarity with other forms of investing. Moving among the dozen or so largest companies in an index is a great way to learn how to invest on the stock market.
You can also invest in rental property on your own, without anyone’s help. This will let you achieve a higher return from renting, but at the same time it carries the risk of vacancies. Another idea for investing in real estate is REITs (Real Estate Investment Trusts), that is, special funds that manage rental properties.
Don’t forget about currencies either. Investing in currencies (though here we mean “pure” investing, without financial leverage) can be an interesting addition to your portfolio. Currency markets are very liquid and offer many ways to make money, although they also require some knowledge and an eye on global trends. They can quite comfortably be compared to stock-market shares.
As you can see, the investment possibilities are vast. By combining different financial instruments, such as investment funds, bonds, commodities, shares, real estate and currencies, you can build a balanced investment portfolio. That way you’ll effectively grow your money while minimising risk.
Specialist investments
Once you’ve gained plenty of experience, you’ll be able to go further. But careful — here we’re going well beyond the basics of investing. The things I’ll cover here are an area for more advanced investors, ready to take on greater risk in exchange for higher profit potential. This is where you’ll find ways to grow your money considerably, but for them to work, you have to understand perfectly what you’re investing in and know what you’re doing.
If you specialise in trading shares, the time may come for investing in young companies, or even startups. If you head towards real estate, you might decide to focus on flips. A deep understanding of commodities, raw materials and currencies, in turn, can take you to Forex or to trading CFDs and other derivatives that use financial leverage.
Financial leverage means taking on credit so you can invest even more funds. This multiplies the gains you can achieve, but it also multiplies the potential loss you can incur.
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An equally complicated financial instrument, which in the hands of inexperienced and beginner investors becomes a ticking bomb, is cryptocurrencies. These modern assets can deliver enormous gains, but their prices are very volatile.
In this group we can also include direct investments in commodities, which require not only that you’ve mastered the basics of investing, but also that you’re able and equipped to store them safely. After all, you’re not going to keep a barrel of crude oil or a priceless work of art in your living room, are you?
You can also take on the role of a business angel and invest in a venture capital fund, whose aim is to finance companies at the idea stage. It’s an exciting form of investing that can deliver significant gains, but it also requires a great deal of knowledge, experience and an acceptance that you could lose all of your capital.
How do investments grow your money?
For investing to become a good way to grow your money, you have to understand how it works. Money makes more money on its own in two ways: through an increase in value and through dividends (or other regular income from capital, such as interest, rent, royalties and so on, which for simplicity I’ll call dividends).
Investing on the stock market is the best example. Shares are stakes in a business. By holding a given company’s shares, you become a co-owner of it. As a co-owner, you have the right to sell your stake and to share in the profits. Let’s start with the increase in value.
If a business grows, earns more and more and holds more and more assets, its value rises. That means the price of your shares rises. The more profit a company keeps for itself, the more assets it can buy and the more it can develop its operations. Its value will rise even faster. It’s similar with real estate, commodities and raw materials. Their value grows over time.
The second way to grow your money through investing is by generating regular income. Some assets generate income. What should you invest your money in to build passive income? Your options include dividend shares, rental property, bonds and intellectual property rights. A company earns, and part of the profit can be paid out to the owners (that is, the shareholders). A property is rented out, so it earns rent. Bonds generate coupons, that is, a regular payment of interest. Intellectual property rights bring in royalties.
There are investments that earn solely from an increase in value (e.g. an investment fund), and there are also those that solely generate income (e.g. some bonds or a deposit). There are mixes too: their value rises while at the same time they generate passive income. This gives you plenty of room to manoeuvre when building your investment strategy.
Knowing the basics of investing, and based on your financial goals, you can decide what’s best to invest in, taking into account which assets will most effectively meet your goals.
The basics of investment analysis
Right, you already know on a general level what to invest in. But how do you choose the specific instruments you’ll buy? Roll a dice? I have a better solution. Here are the basics of investment analysis. To work out whether you have a good investment opportunity in front of you, you can apply two investment approaches. The first is fundamental analysis, and the second is technical analysis.
Fundamental analysis is an assessment of whether there are real reasons for a given financial instrument to rise in value. In the case of shares, it consists of assessing a company’s financial health, its operating results and its growth prospects. By reviewing financial statements and analysing ratios such as P/E (price-to-earnings) or EPS (earnings per share), we can judge whether a given share is worth buying. Investing on the basis of fundamental analysis helps identify companies that have solid foundations and growth potential over the long term. It can of course also be applied to other types of investment: commodities, currencies or real estate.
Technical analysis, on the other hand, focuses on charts. Its premise is: “the market discounts everything,” which means that when we look at a chart, we’re already looking at all investors taken together. That is, according to technical analysis, the chart already accounts for fundamental analysis, but also for the emotions, trends and other factors that prompt people on what to invest their money in.
By analysing patterns and formations on charts, we can predict future price movements and make decisions about what to invest in and how to invest on the stock market. Tools such as technical indicators (e.g. RSI, MACD, trend lines, formations) help determine the moment to enter and exit an investment. This approach is especially popular among people interested in investing on the stock market over the short term.
Protective strategies
Once you’ve picked your instruments, you want to hit “buy now!”, right? Wait a moment. Investing is about growing your money, but the wrong approach can expose you to losses. That’s why it’s worth knowing the protective strategies that will help you avoid financial traps when you’re deciding what to invest in.
One such strategy is cost averaging. It consists of regularly buying more shares regardless of their price, which over the longer term lets you reduce the risk of entering at an unfavourable moment. Thanks to cost averaging, you don’t have to wonder whether it’s a good moment for investing on the stock market. By averaging the price, you buy regularly — both when it’s expensive and when it’s cheap. As a result, you don’t bear the risk of choosing the wrong moment.
Diversification is another key to safety. Cost averaging protects you against the wrong moment, while diversification protects you against choosing the wrong instrument. It consists of buying several different instruments. A vivid way of describing diversification is “don’t put all your eggs in one basket.” By spreading your investments across different assets, you minimise the risk that a single failure will ruin your whole portfolio. And it’s not just about picking a few different shares. Investing in gold, real estate, Polish, French and American shares, and bonds of various countries and companies is a good way to diversify.
Another way of protecting yourself is cutting losses. A stop-loss is used for this. It works like this: if you’ve made a bad investment decision and an instrument that was meant to rise starts falling straight away, the stop-loss sells it automatically. All of this is to limit the loss.
An auto-call, in turn, helps you carry out your strategy. If you reckon a given share will rise in value by 25%, then an auto-call set at that level automatically sells the share as soon as it reaches such a gain.
How to start investing, step by step
Time to pull the basics of investing together and briefly set out how to invest on the stock market. To begin with, you have to establish your financial goals. Setting a goal will help you determine the time horizon and the level of risk you’re ready to take on. Establishing financial goals is important, because you’ll approach things differently when looking for what to commit larger funds to and what to invest small amounts in.
Next, determine the rate of return you want to achieve and the risk you can accept. The greater the potential gains, the greater the risk. And now it’s time to choose the instruments for your portfolio. Consider whether you want to use diversification, cost averaging, a stop-loss or an auto-call.
You can now set a specific buying schedule, establishing a date, a market scenario or technical formations that will point you to the best moment for an investment. Regularly monitoring your positions and making any adjustments will let you react to market changes as they happen.
Set your investment goals and strategies
Start by defining the relationship of return to risk. Are you ready to take on greater risk for higher possible gains, or do you prefer safer investments? Think about your time horizon. How much time do you have to achieve your goals?
Remember to confirm once more the amount you can invest. What to invest 50,000 in, and what to invest small amounts in? The right instruments will differ depending on the sum you have at your disposal.
Decide too whether you care about your investments growing in value, or perhaps about regular passive income. Remember that the greater the share of dividends, the smaller the increase in value — and vice versa.
Choose the instruments for your portfolio
Once you’ve set your investment goals and strategies, the time has come to choose the instruments for your portfolio. First you have to determine the types of assets you want to include in your investment portfolio. These could be shares, bonds, investment funds, ETFs, investing in gold, real estate, and even cryptocurrencies.
If you’re after stable gains and lower risk, you might consider treasury bonds or investing in gold. If, on the other hand, you’re interested in a higher rate of return, shares or investment funds may be more suitable for you.
Determine the level of diversification too. Experts who know the market perfectly concentrate their investments, that is, they pick mainly those that look most promising. Most investors, however, should diversify their portfolio. By spreading capital across different types of assets, even if one investment doesn’t deliver the expected results, the others can make up for it.
Once you’ve determined the types of instruments, it’s time to select specific assets. Analyse the available options, check their history, forecasts and experts’ opinions. Choose those that best suit your goals and strategies. Remember to be guided by analysis, not by feelings or the colour of a logo.
Whether you choose fundamental or technical analysis, what matters is that you make a logical and considered choice.
Choose the moment to buy
You can set a specific date, a market scenario or technical formations to choose the moment to buy individual instruments. If you’re afraid you’ll pick the wrong moment to buy, you can use cost averaging. Thanks to this protective strategy, the decision about choosing the moment loses its significance.
You can decide to buy shares at the start of the month, quarter or year, basing this on historical market trends. Another method is to analyse market scenarios. Watch the financial and economic news that can affect the market.
Many people, including in how to invest effectively on the stock market, are helped by market events. These are announcements of companies’ financial results; central banks’ decisions on interest rates or changes in economic policy can serve as signals to buy or sell.
Technical formations are another strategy that can help in choosing the moment to buy. By analysing price charts and looking for specific patterns, such as head-and-shoulders formations, triangles, or support and resistance, you can better predict future price movements. This approach is especially popular among people interested in investing on the stock market over the short term.
Remember that patience and consistency are the key to success in investing. With the right timing you can increase your chances of growing your money and achieving your financial goals.
Monitor your positions
Now that you know how to start investing and you’ve taken that step, it’s time to monitor your positions regularly. Investing isn’t only about choosing the right financial instruments and the moment to buy, but also about continuously tracking how your investments are doing. It’s a bit like tending a garden — regular reviews and adjustments are essential for everything to grow according to plan.
Monitor the prices of shares, bonds or investing in gold to stay up to date with what’s happening on the market. It’s also worth analysing any changes in the fundamentals of the companies you’ve invested in, such as financial results, changes in management or market news.
If you notice that one of your investments is losing value, consider whether a negative scenario might be playing out. Activating an emergency exit strategy, such as a stop-loss, is very hard for a person. We hate to lose. But it’s better to lose 5% than 25%. Keep your emotions in check, because emotions are an investor’s greatest enemy.
Don’t forget about a regular review of your whole investment portfolio either. Check whether it still meets your financial goals and protective strategies. It may turn out that adjustments are needed — for example, increasing diversification or changing the asset allocation.
Summary
Investing is a fascinating journey that can help you grow your money and achieve financial security. The key is to understand what to invest in and which instruments to choose.
You can start with hygienic and safe investments, such as treasury bonds, bank deposits, investing in gold or real estate. Then, as you gain experience, it’s worth considering investments with a better rate of return, such as investment funds or ETFs on the main stock indices, which will open the way for you to invest across the whole spectrum of the financial market.
Remember to monitor your positions and review your portfolio regularly. Using protective strategies, such as diversification, a stop-loss or cost averaging, will help you protect yourself from your emotions and avoid unnecessary losses.
The world of investing is wide open before you! Start today and build your financial future step by step.
In brief
Investing is an effective way to grow your money and secure your financial future. You can start with small amounts invested in hygienic and safe instruments, such as bank deposits, treasury bonds, investment funds, corporate bonds and ETFs tracking the main stock indices. Remember to use protective strategies, such as cost averaging, diversification, a stop-loss and an auto-call. They minimise risk and protect against emotional decisions.
Once you’ve developed your investing skills, you’ll be able to create an investment strategy tailored to your financial goals. You’ll then make full use of capital growth and dividends, drawing on various types of investment analysis, such as fundamental and technical analysis. They help you choose investments consciously, both in terms of the specific financial instrument and the moment to enter and exit and the frequency of buying.
For more advanced investors there are specialist options, such as investing in startups or venture capital funds, cryptocurrencies, flips, derivatives that use financial leverage, and direct investments in commodities. To use such elements in your investment strategy, though, you have to master not only the basics of investing, but also advanced investment techniques. And above all, you must already have controlling your own emotions down to perfection. Emotions, after all, are an investor’s greatest enemy.
Key concepts
Financial instruments, profit, risk, market conditions, risk tolerance, time horizon, hygienic investments, bank deposits, treasury bonds, rate of return, safe investments, investment funds, SRRI category, corporate bonds, investing in gold, buying property to rent out, shares, dividend, blue chips, passive income, ETFs, stock indices, investing in commodities and raw materials, investing on the stock market, REITs, investing in currencies, investing in young companies, flips, Forex, CFDs, derivatives, financial leverage, cryptocurrencies, business angel, venture capital fund, increase in value, dividend, investment analysis, fundamental analysis, technical analysis, the market discounts everything, MACD, trend line, technical formation, protective strategy, cost averaging, diversification, don’t put all your eggs in one basket, cutting losses, stop-loss, auto-call, emergency exit strategy, negative scenario, investment portfolio, asset allocation.