Monday, October 26, 2009

Basics of investing

 - part of the Money Talks Series

This week I will be demystifying the world of investing. For me, this is the crux of the series and the very reason I started writing it. I wanted to know what I could do with my money that was different from just putting it into a savings account and so I investigated different investment options. Many of you maybe thinking but I'm only a student and I need lots of money to invest, this however is not true. While a large group of investments are dependent upon large sums of money there are very accessible options for you and me. 

Investing is a vast area and there are many options. As such, I will be touching on all the basics and defining all the different types of investments, whilst highlighting the low risk student accessible options available. I feel that now is a very important time to familiarize yourself and become financially smart, especially as women. These are skills that will carry you though life and allow you to be independent and successful.

The Basics

Put simply, investing is simply one step up from saving our money. You are making your money work for you by taking risks with it; it is earning you more money. The best perspective to have is not that of instant gratification but rather about long term rewards and can in some cases result in whats is called a "passive income".

There are three basic ways one can earn money on your savings:

 - Interest and rates: a fixed rate paid for the money you invest
 - Dividends: profit share that is paid to owners of a company
 - Capital growth: this is the money you make when you sell your investments (eg. shares) for more than you

There are two types of investments:

 - Lending investments: lend money to the bank (interest earning savings account) or a bond (lending money
    to the government)
 - Ownership investments: property or shares in a company

*You should focus on lending investments - these are student accessible options.

The risk involved

Investments are grouped into asset classes. This separates them into groups which reflect the type, the return, and the risk involved in a particular investment.

Asset class
- Cash: Bank savings, deposit accounts & money market = Low risk
- Property: Houses or business properties = Low - med risk
- Bonds: Loans to government or companies = Medium risk
- Shares: Companies listed/not listed on the stock exchange = Med - high risk

What are cash investments?

Cash investments are where you and I can participate. This is where you should begin and can grow your capital to make larger investments later on. They are a good idea for two reasons, theses are: as I just mentioned, they are a great way to build up capital to invest in bigger things like property and secondly, they don't tie up your cash  for lengthy periods of time. Basically a cash investment is where interest only is paid on your money. Theses interest rates are higher than just your normal savings account. The interest can often either be paid out into another account or you can choose for it to be reinvested thus earning compound interest - interest on your interest.

Cash investments include:

- Term deposits: or fixed deposits, where you lend the bank money for a fixed amount of time at a fixed
  interest rate. This interest can grow as you add more money to your investment. A usual minimum amount of
  R1000 to which you can add deposits of a minimum of R250 or more.

- Money market: your money is pooled with other investors and lent to big institutions. Here you will receive
  a higher interest rate. However, the starting sums are rather large with respect to what a student or graduate
  can afford. The minimum starting amount is R20 000

What are property investments?
 Def: a property investment is not only buying your own home, there are many types of property in which you can invest. Rental income and capital growth are two good reason to invest in property.


 - Residential: someone else pays rent to live on your property

 - Commercial/Industrial: a business pays rent for your property

 - Mortgage participation bonds: lend someone money to buy their own property

 - Life insurance endowment bonds: the basis is in property investments

 - Property unit trusts: where you invest smaller amounts in companies that specialize in property investment

 - Property syndicate: this is where you form a group (syndicate) of people who all buy a property together

What are bond investments?
 Def: a different way of saying you are lending money to a large institution.
  • they borrow your money and pay you interest for the time they are borrowing it from you
  • investing in bonds and the bond market is very tricky and traders spend years gaining experience in this area
What are shares?
Def: you are buying part of a company, essentially making you a part owner. 
  • as part owner you can expect to get part of the profit
  • when these profits are paid out they are called dividends
  • companies often sell shares when they want to expand/buy new equipment and need cash flow
  • as the prospects of the company go up so does the price of the shares, thus, you can make a capital gain by buying low and selling high
  • if a share has an upward trend (positive) it is called a "Bull Market"
  • if the share market has a downward trend (negative) it is called a "Bear Market"
  • the share market is also known as the equity market
 How do I start investing?

As a student, especially, investing often seems way out of your reach and even if you have the funds to do so it is a daunting undertaking and often people don't know where to begin.

Here are 10 points to keep in mind when you start investing that will lessen the risk:

Point 1 - Take your time
  • Never be rushed, take your time. There are loads of investments out there and just because you missed out on one doesn't mean you aren't going to make money somewhere else.
Point 2 - Think long term
  • Investing is a long term affair and you should never view it in the short term as you will often lose money this way, especially in bonds and shares.
Point 3 - Look around 
  • Always do a thorough job of investigating each investment you consider, don't just invest because someone else made money there. Always make sure an investment is legal - Financial Services Board
Point 4 - If it seems too good to be true....
  • Unfortunately it usually is, if you are offered an investment that is guaranteed an unusually large high return be warned that it is usually a scam. No one can reliably predict a consistency of high returns. There of course the odd legal investments which do have very high returns but these are far and few between so do beware.
Point 5 - Consistency
  • Be consistent, don't switch between different investments. This is a surefire way to lose your money with all the additional cost involved in the admin of switching. Also, your money never has the opportunity to grow to its full potential - THINK LONG TERM.
Point 6 - Stay calm

  • The markets are always constantly fluctuating so don't panic; stay with your investment. All you have suffered is whats called a "paper loss". The moment you with draw your money you suffer an actual loss so stay calm and confident. 
Point 7 - Never invest on borrowed money
  • Borrowing money to invest is very dangerous and a big no-no.
Point 8 - Nothing can be predicted
  • Don't believe those who say that they can predict with certainty what the market will do, if they really could why would they share their knowledge with you?
Point 9 - No such thing as a stupid question
  • None of your questions will ever be stupid, its your money. Always ask as many questions as you like and get the answers in writing. If the answers are not satisfactory, walk away.
Point 10 - Diversification
  • Avoid putting all your eggs in one basket as they say. Vary your investments across the asset classes. That way you won't lose all your money in one go. 
As student or recent graduates your best bet is a term deposit. Search you banks website looking under investment and look at the different accounts that they offer. I, for instance have what is called a "notice account". The minimum amount is R1000 and you can add to it at any time with amounts of R250 or more. Interest rates fluctuate depending on the amount of money in the account and are paid daily either into the account of your choice or reinvested thus earning compound interest. In order to access the money you need to give the bank 32 days notice this ensure that you can't make impulse purchases but allows you have access in an emergency or should you wish to make further investments with it.

Remember that each bank has a different portfolio aimed at different markets so chop around before you get your foot in the door!

Please don't hesitate to ask any questions should you want more info, I'm always ready to help. Have any of you ever invested? Do you have any thoughts on the subject? Leave a comment!


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