Investing is a means of amassing wealth. However, it is not as simple as it may appear. There are a number of concepts that investors must understand to maximize their returns. It can be a difficult decision for novices. Beginning an investment portfolio can be overwhelming. Additionally, it can take time to learn and comprehend investment concepts. This article explains investment concepts that a novice should understand.
Here are fourteen essential investment ideas you should understand as a novice. Not only are these concepts fundamental, but they also form the basis of your financial journey.
1. Financial Plan
A well-crafted financial plan is an initial and most important phase in the investment process. These plans include purchasing a home, supporting your child’s school, investing for retirement, etc. These plans change with time.
A financial objective can assist you in comprehending your investing needs and selecting the appropriate investment accordingly. As there are numerous investment possibilities, such as stocks, mutual funds, real estate, etc., you can choose the appropriate one based on your objectives. If your objective is to purchase a home within the next ten years, you can choose a long-term investment option. With a defined objective in mind, you can devote yourself to achieving it and keep an eye on the milestones along the way.
It is good to establish your financial objectives early in your career. You can consult a financial expert and devise a strategy for achieving your goals with your income.
2. Recurring Cashflow
As an investor, it is crucial to know your monthly income when setting a financial goal, regardless of your career. You can invest on a full-time or part-time basis. Regardless, you should have an accurate estimate of your monthly income and expenditures. This will help you effectively arrange your investments, savings, and expenses.
3. Risk and Rewards
Risk is an essential aspect of an investment. Every investment involves some degree of risk. Before selecting an investment, investors must evaluate their risk appetite, considering the worst-case scenario and their loss tolerance.
This investment notion can be intimidating for novices, but it is essential to understand that it is an integral element of the investment process. There are investments with little risk, but the rewards may not be as high as those with moderate to high risk. While establishing your investment objective, you need also to assess your risk tolerance.
4. Returns
Investment risks and profits are interdependent. Numerous investing opportunities are connected with considerable risk and yield enormous returns. In the event that market conditions are unfavorable, these high-risk investments may also decline and result in a loss. However, profits on low-risk investments may not be as large as anticipated.
Huge return investments can be alluring for a young investor. However, it carries a danger. Regardless of the risk component, it is vital for a newbie to grasp the workings of an investment and the market before digging deep. You can employ the strategy “slow and steady wins the race” with your hard-earned cash.
5. Complementing
Investing relies on the alchemy of compounding. Your investment expands tremendously through compounding. In basic terms, you will obtain returns on your returns through compounding. Here is an example to help illustrate the power of compounding.
Consider that your initial annual investment amount is ₹20,000 for 12 years. If the annual interest rate is 15% and it is compounded monthly, the investment will grow as follows:
| Years | Future Value (15.00%) | Total Contributions |
| Year 0 | ₹20,000.00 | ₹20,000.00 |
| Year 1 | ₹23,235.97 | ₹20,000.00 |
| Year 2 | ₹26,995.51 | ₹20,000.00 |
| Year 3 | ₹31,363.34 | ₹20,000.00 |
| Year 4 | ₹36,437.88 | ₹20,000.00 |
| Year 5 | ₹42,333.48 | ₹20,000.00 |
| Year 6 | ₹49,182.97 | ₹20,000.00 |
| Year 7 | ₹57,140.70 | ₹20,000.00 |
| Year 8 | ₹66,385.97 | ₹20,000.00 |
| Year 9 | ₹77,127.12 | ₹20,000.00 |
| Year 10 | ₹89,606.17 | ₹20,000.00 |
| Year 11 | ₹1,04,104.30 | ₹20,000.00 |
| Year 12 | ₹1,20,948.22 | ₹20,000.00 |
After 12 years, the return on your investment of ₹20,000 will be ₹1,20,948.22. It is evident how compounding works. The money keeps multiplying itself, and the returns are huge in the long term.
6. Investment strategy
As stated previously, your investment approach will rely on your financial objectives. If your objective is to amass a substantial amount of wealth for the future, you may adopt a gain-oriented strategy. There are income-based investment techniques available for those wishing to produce revenue.
Additionally, you must understand methods such as active and passive investments. Active investment necessitates that the investor is actively engaged in purchasing and selling equities. They are responsive to market swings. In contrast, passive investing is a method in which the investor does not actively trade.
Regardless of your financial experience level (beginning or expert), you must be well-versed in investment methods and their universal applicability.
7. Market Capitalization of Stock
This is for anyone interested in investing in stocks. A company’s market capitalization is nothing more than its market worth. The market value of a company’s stock determines its classification. It enables an investor to comprehend a company’s worth and growth prospects.
Small-cap firms have a market value of less than Rs. 5,000 cr, mid-cap companies have a market value between Rs. 5,000 cr and Rs. 20,000 cr, and large-cap companies have a market value greater than Rs. 20,000 cr. These companies are rated on the stock exchange according to their market capitalization.
You may determine a company’s market capitalization by multiplying its current share price by its outstanding share count.
You can also use the Tickertape Stock Screener to filter the stocks based on market capitalization and other characteristics.
8. Volatility
It refers to the fluctuation of a stock’s price. Low-risk or safe stocks tend to be more stable than high-risk or volatile stocks.
In publicly traded stocks, beta, a standard measure of volatility, is accessible. If beta is more than 1, the stock is more volatile than the market as a whole. If beta is less than 1, the security is less volatile than the market.
Although beta does not provide a complete picture of a stock’s risk, it is one of the factors that determines a stock’s risk.
9. Portfolio diversification
A sage once advised, “Don’t put all of your eggs in one basket.” This also applies to investments. You can diversify your portfolio by purchasing stocks, real estate, bonds, etc.
If you wish to invest in stocks, for instance, you can diversify between small-cap, mid-cap, and large-cap companies. Different companies respond differently to varying market conditions. When one stock declines, the other may rise to offset the loss. It is a risk-management method.
10. Asset allocation
This considers the investor’s age, ambitions, and risk tolerance in order to balance the risk and benefit of the investment. Fixed income, stock, cash, and real estate are the four primary asset classes. Asset allocation refers to the proportion of capital allocated to these assets.
Asset allocation and diversification are related. Diversification is an asset allocation strategy. Asset allocation assists in establishing the optimal investment plan for marketable securities. In contrast, diversification occurs when the investor wishes to increase the size of the investment by allocating a modest proportion of the capital to several assets.
11. Buy and hold investment strategy
Buy-and-hold investing, as its name suggests, is a strategy in which the investor purchases stocks with the intent of holding them for an extended period of time. This strategy will aid in capitalizing on the long-term expansion of the stock market.
12. Investment costs
Every investment has a number of hidden fees. Beginners should begin by carefully reading the terms and conditions. This will assist you to prevent all the unneeded expenses that can become costly in the future.
13. Insecurity
There is no assurance that a specific investment will always perform well. It may be good or bad right now, but the growth predictability one year from now is unpredictable. Prepare yourself mentally even if your investment fails. Establish an emergency fund to assist you in times of uncertainty.
14. Rebalancing
The investment process is not one of investing and forgetting. You must periodically rebalance your portfolio to meet the target allocation. Simply put, following a period of investment, you will dilute underperforming assets and invest in those with growth potential. The objective here is to establish risk management and guarantee that the portfolio’s profit or loss is not solely based on a single asset class.
Conclusion
Investing can be straightforward once you grasp the fundamentals. Understanding the core ideas will establish a solid foundation. In addition to the aforementioned notions, there are a number of other characteristics that you must understand before selecting an asset class. Before investing in any asset, it is necessary to have a solid understanding of the investment. For instance, many individuals believe that investing in stocks is simple and yields great profits, yet the stock market is not always profitable. It depends on a number of global variables. Keep things simple and play it safe until you have a better understanding. You can consult a financial expert for assistance with your investment.
