How Does Investing Work?

For those completely new to investing, curious beginners, or those who just want to know what all the fuss is about, here's the absolute basics of investing and how it works.

For those of you already familiar with terms like asset classes, stocks, bonds, and dividends, please look away. This is a guide for absolute beginners who have zero experience or knowledge in investing and want to know everything from top to bottom to get started. Here we go!

What Exactly is Investing, Really?

When you're investing your money, it means you are spending money in the hopes of getting some financial returns out of it. Just as your monthly salary is the reward you get for investing your time and energy into your job, a financial investment is when you put in your money into an investment vehicle in return for monetary gain.

I Make Enough At My Job, Why Would I Do This?

Because as much as you make now, you're still exchanging your time and energy for money. Eventually, as you reach retirement age, you won't be able to expend as much effort and time towards your job.

Therefore, using some of the money you already have to generate more money is a good way to help you reach your retirement goal faster and give you more time to spend the money you've been making. So if you have some funds in your bank just sitting there doing nothing, you're better off investing some of it.

That Sounds Like a Lot of Work...

It is. The way all money generates more money is in its use as capital. For example, you can use some of your savings to buy an ice-cream shop (this is your capital). You then pay the cost of running the shop until your profits from selling exceed your expenses.Those profits will then have to exceed your initial capital for your investment to be considered lucrative.

All of that takes a lot of work, time, and risk. It would be much easier if you can just pay somebody to take care of that ice-cream shop for you. Thankfully, investment vehicles offered by banks do exactly this. You put your money in one of these investments and a third party will help use that money to generate income for you.

What Kinds of Investment Vehicles Are We Talking About?

Generally there are 4 types of investment, (also known as 'asset classes'):


  • The interest you get over time when you save your money in a bank


  • Where you loan out your money to a company or the government and they generate profit for you


  • Where you buy part of a company to get a percentage of their profits (also called 'dividends')


  • Where you invest in a building and get returns based on people who pay to use that building

All of these investments rely on using your money as capital in order to turn a profit on a sale or business. They do the dirty work of managing that business for you and you just wait for the profit to roll in.

Wait a Minute, Businesses Sometimes Lose Money, Don't They?

Sometimes, yes. This is why you often hear of people 'diversifying their portfolio', which means investing in a lot of different asset classes to balance out the risk of losing money. That's the thing most people are apprehensive about when it comes to investing: the fact that there is some potential to end up with less money than you started.

However, there are certain investments that can guarantee you don't lose your capital. Fixed deposits for example, function like beefed up savings account that can net you solid returns with no risk of losing capital.

Investing, just like business, requires a certain understanding of the risks involved. It can be a lucrative way to help you make more money if you're keen on trying it out of course. Is there anything unclear about investing that we didn't manage to cover in this article? Drop your question in the comments section below and we'll help you out!


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