11 Concepts You Should Understand Before You Start Investing
Are you considering starting to invest but do not know where to start? Don’t worry! After all, that is normal. When one sets out to start doing or learning something, he knows almost nothing about that something.
And what is the best way to lay the first foundations? Undoubtedly, the most basic concepts will allow you to move through any other type of information, guide, or resource you are looking for to train yourself.
So, in today’s article, we will give you the concepts you must understand before you start investing if you want to be successful.
They are general concepts, but as you will see, you will find them very useful. In addition, although these concepts are useful for understanding the financial world, they are also useful for understanding the whole world in general. They give you a new perspective from which to approach things.
1. Investment
The first concept is investment. And it is that not everyone ends up being clear about what “investment” means.
For many people, home ownership is an investment. And, in a sense, it is, but to stop there is to fall far short. Investment should be considered everything that increases our heritage and generates a return.
2. Markets
The concept of “markets” is also very important. This concept refers to any place where goods or services are exchanged. In general, the entire global economy can be considered a market. But, later, we can differentiate different subtypes of markets.
For example, the stock and real estate markets are part of the big market, but they are limited and have unique characteristics that they do not share.
3. Bag
The Stock Market is a market in which property titles to companies are exchanged. Or what is the same: actions. When buying stock, you should consider the entire company. Would you buy Disney outright?
If the answer is yes, buying Disney shares is a good idea. But, of course, you have to look at the company to find out if you would buy the whole company.
4. Commodity
Another important concept is commodities or raw materials. There is a whole market for them, but their importance transcends that market and affects the entire economy (and other markets).
After all, any business and any economy runs on raw materials. Having them on your radar and understanding how they work is critical to making money investing.
5. Cryptos
Cryptos involve all kinds of cryptographic projects. Crypto is often confused with Bitcoin or “new money,” but the truth is that it is something that goes much further. In fact, currently, most of the projects in the crypto market are not about money but rather seek to be something else (art, start-ups, video games…).
Keeping the crypto world on your radar is good if you want exposure to potentially huge (but risky) returns.
6. Real Estate
Real estate is another great market and has historically been the most used investment method, especially in Spain. Most Spaniards only know how to invest by buying real estate.
This is not very good because the best thing would be to know different markets and take advantage of the best one in each case. But beyond that, you can find great opportunities to invest in real estate.
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7. Return On Investment
Another essential concept is that of “return on investment.” With this concept, we refer to how much benefit a certain investment will bring us, and it is something that we have to be clear about to know if we are interested in making it or not.
In addition, we are also interested in buying between two or more possible investments to know which one to opt for. Of course, we also consider the risk to which we expose ourselves in each case.
8. Risk / Benefit
Continuing with the above, the “Risk / Reward calculation” is another great concept we must consider. The benefit of an investment can be understood as its return, which we have seen before.
Risk is the probability of losing the investment (or, in some cases, volatility). To choose between two investments, we must consider the return that we expect to obtain and the risk we will assume.
9. Volatility
In the previous section, we have mentioned “volatility.” This concept will come up many times when you research investing. But… what does it mean?
Volatility is nothing more than the movement of the return of an investment over time. For example, an investment whose return goes from +10% to -10% daily will be more volatile than one from +5% to -5%.
It is important to clarify that this will be the case even though both investments, at the end of the term that we have decided to invest (let’s imagine, one year), have given the same final return.
For example, 10%. If both investments have that 10% final return, but one is less volatile than the other, the smart thing to do is to bet on the less volatile one. However, the most volatile investments often provide the best long-term returns.
10. Investor Profile
The next concept is the investor profile. This concept refers to our way of being as investors. And it is that not all types of investment are for any type of investor.
Those people who are more risk-averse will prefer more conservative and less risky investments. And vice versa. Investing only in what is consistent with our investor profile is important.
11. Leverage
The concept of leverage refers to the use of debt to invest. It is very common in certain markets, such as futures. However, when we buy a property with a mortgage, we are also leveraging ourselves. Leverage can increase our returns, but it also increases our risks.
These are the basic concepts that you must understand before starting to invest and that are fundamental.
If you do not master them, it is very likely that you are lost and do not know what they are telling you in the guides, documents, and resources that you use to train you. If you are clear about these concepts, all subsequent learning will be much easier for you.
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