Basics of Investing: A primer for your first investment

By Shlok Kamat

16th Jun 2022

4 mins read

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Learning to invest is like learning a new language, and mind you, learning a new language when you’re an adult. Even the humble alphabets pose a massive challenge. Investing is similar in a sense. Without proper context, it's a messy jungle of jargon. Although you do understand we are here for the rescue, correct? Once you master certain basic investing principles, you will be adequately equipped to understand the best avenues for your hard-earned capital.

Before we get going with investing for beginners in earnest, a gentle suggestion… relax. The field of investing is a large one, and there’s virtually an infinite amount of things to learn about investments. The best, most successful investors will tell you that they are continually learning and continually honing and expanding their skills at making money in the financial markets. You can’t learn everything there is to know about investing or even just investing for beginners in one day. Still, fortunately, you don’t need to do that to begin a career as a successful, profitable investor.

One of the most glaring holes in our educational system is the lack of even primary education in personal finance and investing. One of the most successful traders in history once remarked, “If I’d only been taught in high school what I later managed to learn on my own about investing, I likely could have retired wealthy by age 35.”

Put simply, investing is setting aside a portion of your money while you carry on with your daily life, hoping that this money will work for you and grow. On the flip side, saving does not give you the liberty of growth.

Basic types of Investing

There’s an endless list of specific investments you can make. Still, nearly all investments fall into one or the other of a handful of categories commonly referred to as “asset classes.” An asset class comprises investments with similar characteristics that are also usually governed by the same set of financial regulations.

Asset Classes

The asset classes that most people are familiar with are as follows:

Equities/Stocks

Fixed Income investments/Bonds

Cash or cash equivalents, such as money market funds

There are several other asset classes you may wish to explore investing in at some point, which include the following:

Commodities and futures, such as oil or gold

Alternative investments, which include real estate, foreign exchange (forex), and collectables

Sustainable, Responsible and Impactful investments (SRI) with a primary focus on beneficial social or environmental effects

Equities

A majority of you, while growing up, would remember pitching in money with your cricket buddies to buy a ball called “Rocky”. Rocky was the elite breed after the ₹15 “Jumper”. If you can relate to anything similar, you already understand what equity is. You and your friends invested money to buy that ball means that you all hold equity in that ball or are part-owners. Now, things are great until there are a handful of investors, but when thousands and thousands of people invest in a company, there should be something that gives them their own and acts as proof of it.

That something is a stock (loosely). If you hold one store of a company, you own a part of it. To put things into perspective, If you had one share of Infosys Ltd. on the 7th of February 2022, you theoretically own 0.0000000237 % of the company! Share certificates are issued against these stocks, which act as the final proof of ownership. These certificates used to be in paper format back in the day, but now they are stored in a dematerialised (digitised) form in your Demat accounts.

Fixed Income Investing

Fixed income investing refers to investments in debt securities that offer investors fixed-rate interest payments over a specified time frame – the life of the debt security. Debt securities are most commonly referred to simply as “bonds.”

When you purchase a bond, you provide financing for a company or a government, and in return, you receive a specified interest rate, known as the “coupon rate.” Interest on bonds is typically paid semi-annually or annually until you receive the bond’s total principal amount back on the bond’s specified maturity date.

The coupon rate is the yield offered on the bond when it is issued. As interest rates fluctuate up or down over the life of a bond, the value of the bond and its actual “yield to maturity” change. Coupon rates do not change over the life of a bond, but varying interest rates do affect the bond’s value and yield. As interest rates rise, bond prices fall; conversely, as interest rates fall, bond prices rise.

For investors who hold bonds to maturity, fluctuating yield to maturity rates during the bond's life have no practical impact on their investment return. The current yield to maturity rate only comes into play if you buy or sell a bond in the secondary market sometime before its maturity date.

The primary appeal of fixed income securities is their relatively low risk. If you’re buying bonds issued by a major country such as India, making the specified return is virtually guaranteed since these bonds come with a sovereign guarantee and defaulting by these instruments is nil.

Risk and Opportunity

One of the basic principles of investing for beginners is this – risk and opportunity go hand in hand. They increase or decrease in conjunction with each other. Investments that offer higher potential profit carry correspondingly more elevated levels of risk. Likewise, investments with a lower possible return on investment (ROI) typically provide greater security and less risk.

The habit of regularly investing even small amounts of money is worth cultivating, a practice that will pay off handsomely for you.

FAQs

What is the difference between saving and investing?

Saving is putting money aside for future use. It's important to save so you can cover fixed expenses, like mortgage or rent payments, and to make sure you're prepared for emergencies. Generally, people put their savings in bank accounts.

Investing is when you put your money to work for you. You buy an investment, like a stock or bond, with the hope that its value will increase over time. Although investing comes with the risk of losing money, should a stock or bond decrease in value, it also has the potential for greater returns than you’d receive by putting your money in a bank account.

Is investing risky?

Investing has risks. The goal is to manage them. We believe the best way to do this is to have a plan, know when you’ll need the money, and diversify your portfolio.