WHY SHOULD I
START INVESTING?

Investing is about balancing risk and opportunity. Making yourself aware of the potential risks involved is an understandable and sensible starting point, but there are reasons why the opportunities associated with investing might mean that taking the next step is the logical approach.

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Starting to invest in the financial markets can seem like a daunting prospect, especially if you don’t understand how the stock market works or are unsure where or how to invest your money.

However, given the potential benefits and risks of investing, it’s worthwhile learning how it works. Whether you’re planning for your financial future, looking to generate passive income or trying to protect yourself from price inflation, investing can help you achieve your life goals.

What is Investing?

Investing is simply the art of committing resources, especially money, to a product, service, or anything that can gain value over time. 

Aiming to improve your financial situation through investing is not a bad idea. However, developing a carefully considered investment plan puts you in the best position to do so. To begin with, the question is: “What is an investment?”

An investment is any method or tool that takes money and commits it to the capital markets. 

For example, one can invest in the stock market with the hope of getting more in the future.

Once you know what investing is, it’s important to establish what you want to achieve from it. Consider the investment time horizon (how long you can wait to enjoy its potential benefits) and your target rate of return (your projected margin for the capital growth).

It also helps to make a realistic assessment of other factors, including your risk-tolerance [Glossary:The level of risk that a trader will tolerate as part of their trading plan] and understanding of the markets. Whatever your approach, different types of investments cater to different needs. The same applies to risk and experience levels.

Why Should You Invest?

There are many reasons why people start investing. Here are some good ones:

• To reduce the inflation burden: Historical data points to many investments increasing in value at a greater rate than inflation.

The buying power of cash held in bank accounts is eroded over time by the rate of inflation, which tends to be higher than the interest rates for savings accounts.

“In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation.”

International Monetary Fund

• Financial planning and retirement: Investing can help you plan for the future, financially speaking. Research suggests that long-term investment plans have the potential to achieve their targets because they can ride out short-term market volatility.
• To create passive income — Some types of investments pay out regular returns, such as stock dividends. Individuals can choose to reinvest that cash flow or use it to supplement their current lifestyle.

Analyst Sam looks at them more in the following video.

Your reasons for investing may change over time. Equally, investments can be adjusted over time to account for changes in your personal circumstances.

If your work-related income increases, there is additional opportunity for extra capital to be allocated to riskier assets, such as stocks.

It’s also possible to plan so that investments can be accessed at an earlier date than originally intended, essentially functioning as “rainy day” money that can be fallen back on if needed. This type of investment is more likely to be in fixed-income, less risky assets.

Other Reasons to Invest

There are plenty of other reasons to start investing, although not all of them will apply to every investor, as everyone starts from a unique position.

• Investing is now less complicated than ever — It’s now possible to have a relatively “hands off” approach to investing by setting up recurring payments in an investment account, and utilising the Stop-Loss and Take Profit risk management tools, depending on your investment strategy. It’s important to monitor your portfolio returns, but the investment process can be automated in a number of ways.
• There is no need for extensive cash reserves — The trading of fractional shares allows you to buy small quantities of a firm’s stock — such as tech giant Apple Inc. (AAPL) — that might otherwise be inaccessible to first-time investors.

• Tax advantages: Some investment schemes and products that provide tax breaks are actively encouraged by governments, meaning that investors get to keep more of their money.
• Benefit from compound returns: Compounding is one of the secrets of successful investing. Reinvesting any interim returns can cause your investment to “snowball.”
• Improve your wealth management: Without financial goals, there is a greater likelihood that you will spend more money than necessary. Investing can help to keep you more disciplined and conscious of what you’re spending and why you’re spending it.

Risks of Investing

Despite the promising outlook, there is no guarantee of making money when investing. Prices of assets can rise and fall at a moment’s notice due to various reasons, making it essential to do a proper market analysis and employ effective risk-management strategies for the best outcomes.

Final Thoughts

There are essentially two things you can do with your income that might encourage financial growth over time: save money or invest money. For many, investing is the variable that can be most easily influenced. With careful planning, it is possible to start investing, beat inflation, generate a secondary income stream and meet your financial targets.

Head to the eToro Academy to find further guidance on how to start investing.

Quiz

FAQs

Is investing better than saving?

Your current financial circumstances will determine whether investing is better than saving. However, investors looking to beat inflation and improve on their potential interest could consider investing in indices, which track the price movements of a group of assets, such as stocks.

Should I invest if I don’t have an emergency fund?

Not having spare cash on hand to manage short-term cash flow problems can result in you missing out on some of the beneficial aspects of investing. Having an emergency fund allows your investment strategy to play out as planned.

When is the best time to invest?

You are never too young or too old to start investing. However, it may be better to start investing as early as possible because results take some time. A long-term view can incorporate the benefits of compounding and help you ride out the ups and downs of the market.

What are the main benefits of starting to invest early?

Starting early allows the compounding effect to potentially work in your favour for longer. Starting early also gives you more time to develop investing skills and fine-tune your approach and achieve your financial goals.

Can I invest with little financial knowledge?

It is important to have a clear understanding of the risks as well as the opportunities of investing before opening your first trades but it is also worth noting that there are some instruments which typically suit beginners. These include ETFs that track the major global stock indices, such as the S&P500 Index, which removes the need to research and pick individual stocks.