Investing is the act of putting your money into assets that will produce income or returns. In physical terms, buying a machine to produce goods that we can sell is investing, that is investing into real assets. Another example is buying a property that we will rent to someone, to produce a rental income. This is also investing, real estate investing, and it is the oldest and traditional way of investing money.
Step 1: Save
Put some money aside, that is build your personal savings, that will later be a source of money for a particular project or when your regular income stops. This kind of investing is key to building your wealth, but it’s often not enough. The type of financial assets you can buy with your savings is also a key factor for building your wealth.
Step 2: Which Financial Assets to Buy
You need to choose which financial assets you will put your money into. Should you choose the low risk of fixed income or the high risk of variable income ? The choice seems quite obvious at first glance but it’s actually an illusion and does not take into consideration other important factors such as the strong relationship between risks and returns, a topic we will discuss later.
Types of financial assets you will need to choose
There are two major types of financial assets: fixed income and variable income. Fixed income assets refer to a financial asset that brings in a set amount of interest income on a regular basis, such as bonds or fixed deposits accounts (CDs). Variable income assets usually refer to equity investing, that is money put into the acquisition (ownership) of a business or a property.
Step 3: How to buy your Financial Assets
You will need to choose which investment bank to trust for managing your money. You can buy financial products and all kind of financial instruments at asset management firms, brokers, or insurance companies. In many cases, these organizations pool the investment money they receive to make large-scale investments, and each individual buyer/investor has a financial claim on a portion of the larger investment. Alternatively you can buy individual securities directly on a national exchange or bourse, through a broker, who will handle all market orders for you for a small commission.