Investing has become one of the hot topics of conversation. It’s everywhere from your Friday drinks with mates to your TikTok feed – everybody wants to know how they can start making their money work harder for them with investments!
With different types of investments now more accessible than ever (read: you don’t need to be a rich white bloke to do it anymore), there is huge value in getting across the basic principles of investing. And luckily, we’re here to answer seven juicy questions you might have if you’re looking to dip your toe into investing. Let’s go.
What is investing, and what can I invest in?
Put simply, investing is the act of purchasing or acquiring an asset with the intention of making a profit from it. That might mean investing in shares in a company via the share market, investing in property, or alternative investments like cryptocurrency, infrastructure and even collectibles.
How do I earn money from investing?
The specific way you make money from investing depends on what you’ve invested in, but there are generally two forms of profit-making from an investment: cash flow and capital growth.
Cash flow involves making an income from owning your investment, for example renting out a property to tenants. Capital growth involves buying the asset at one price and selling it at a higher price in the future. The difference between the price you pay for it and the price you sell it for is called your capital gain (or loss).
An investment that offers the potential for capital growth only is known as a one-dimensional asset, while some investments offer the potential for both cash flow and capital growth – these are known as two-dimensional assets.
Property investing and shares investing are both generally considered two-dimensional assets because you can make money from ownership (without selling), and also make a profit when you do sell. Property can generate income through rent, and shares can pay dividends each year.
Wait, what are dividends?
Great question. Dividends are essentially a portion of the company’s profits that are paid out to shareholders each year, so if you have a share portfolio of $100,000, and earn a dividend yield of 2%, you could earn $2,000 per year for doing absolutely nothing, and without having to sell your investments. The downside is dividends aren’t guaranteed, so if the company makes a profit, you’re not automatically owed a dividend.
What are the risks of investing?
The core principles of investing sound great. Buy something, sell it for a profit, make money. Simple, right? Well, not exactly. It’s normal for investment values to fluctuate, whether that’s share prices of a company going up and down, property prices increasing and decreasing, or the value of cryptocurrency doing its thing.
Ultimately, there is always a risk with investing. The property market could crash and you could be left unable to sell an investment property. The company you’ve invested in could go bankrupt. The key to managing risk with investing is diversification.
Diversification is all about ensuring your investments are made up of different asset classes and different risk levels. When it comes to shares, Exchange Traded Funds (ETFs) and Managed Funds can help with diversification. These are essentially groups of shares from multiple companies, that tend to offer slower growth but a more balanced risk.
How do I decide what to invest in?
We’ve thrown a lot of information at you, and there’s a whole lot more out there (!) so wondering what the heck you’re supposed to invest in is a totally valid question. There is no one thing anybody should invest in, so it’s really a case of doing your research on what’s available and making a decision that’s right for you.
Some choose to invest in things that align with their values, for example environmentally conscious companies, or healthcare, or female-founded businesses. Others invest in things that interest them, like tech or startups or finance. It comes down to balancing what matters to you, with the future potential of the money you invest.
When should I start, and how much do I need?
There’s no should with investing, but when it comes to timing, there’s an age old saying: time in the market is better than timing the market. What this means is, historically, spending longer in the market (holding your investments) has served investors better than trying to buy investments at strategic times.
If you’re asking yourself when you should start investing, it’s really a case of as soon as you feel comfortable and confident with what you’re investing in, and when your finances are in a position that allows you to take on the risk. Any money you’re looking to invest really needs to be money you can reasonably live without for the next five years at a minimum.
Should I invest or save?
Something that holds back a lot of would-be investors is not knowing whether to save their money or invest it. Again, a lot of it comes down to how much risk you’re willing to take on. Savings accounts hold your money statically while paying a small interest rate each year, so the value isn’t going to go up and down like an investment value would.
For this reason, it’s wise to ensure you have sufficient savings (like an emergency fund) before you start investing. This means you’ll have a fallback option if you need to access money, without having to sell your investments.
With so many people talking about their shares investments, you might be wondering where you actually go to buy the darn things! Do you add them to cart online? Do you go to the bank? It’s a great question. Where you buy your shares, ETFs or Managed Funds will vary depending on where you live, but generally you’ll need to access a share trading platform. That might be through your bank, like Commsec in Australia, or ASB Bank in New Zealand. Here you can buy shares on your country’s stock exchange. Other non-bank trading platforms include SelfWealth (AU) and DirectBroking (NZ), or Stake for buying US shares.
For beginner investors, a surge of micro-investing platforms are taking the market by storm, and can help you get comfortable with shares investing with as little as $5. These app-based platforms like Raiz (AU), Spaceship (AU), Sharesies (NZ) and Kernel (NZ) tend to invest in Exchange Traded Funds (ETFs), managed funds and occasionally individual stocks, too. Their quick and simple jargon-free systems make investing far more accessible to anyone on any income, and may really help you on your investing journey.
PocketSmith supports a number of popular investment accounts and can help you track your investment progress and forecasts within the context of your overall financial position. Plus, if you’re working with a financial advisor, our Advisor Access feature lets you give them secure access to your dashboard and share complete visibility on your financial position.
Emma Edwards is a finance copywriter and blogger, on a mission to humanize the financial services industry by creating meaningful content that’s accessible and empowering. You’ll find her penning money tips at her blog, The Broke Generation, sharing financial insights on Instagram, or injecting life into content for her business clients.
