Why should I start investing?

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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 a passive income or trying to protect yourself from price inflation, investing can help you achieve your life goals.

What is Investing?

Aiming to improve your financial situation is never a bad idea, and developing a carefully considered investment plan puts you in the best position to do so. There is a lot to learn about investing, so perhaps the best place to start is with the question: “What is an investment?”

An investment is any method or tool that takes money and commits it to the capital markets — for example, the stock market — in 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 the potential benefits of your investment —and your target rate of return — the size to which you ideally want your capital to grow.

It also helps to make a realistic assessment of other factors, including your risk-tolerance and understanding of the markets. Whatever your approach, there are different types of investments that cater to different needs, as well as risk and experience levels.

There are essentially two things you can do with your income that might encourage financial growth over time: save money or invest money.

Benefits of Investing

While investment aims may differ from person to person, there are three common reasons why people start investing:

• 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 savings account interest rates.

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.

• Create a passive income — Some types of investments pay out regular returns, such as stock dividends. Individuals can choose to reinvest that cashflow or use it to supplement their current lifestyle.

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 out from a unique position.

• Investing is now less complicated than ever — It’s now possible to take 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. 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 — 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

Although there are plenty of reasons that someone might want to start investing, remember that there are also risks involved. There is no guarantee of making money, and prices can rise and fall at a moment’s notice, especially in asset classes that are more volatile than others. There are a number of reasons that your investment could fall in value:

• Market risk — the chance of something impacting the overall performance of the financial markets, such as changes in interest rates.

• Systematic risk — the possibility that something will shock the entire market, such as geopolitical changes or wider economic events.

• Specific (unsystematic) risk — the risk of something affecting individual companies or certain sectors specifically, such as sudden and unexpected changes in the weather or material shortages. 

• Liquidity risk — the chance of a company not having enough cash to meet its financial obligations.

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.

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[1] International Monetary Fund

[2] Investopedia

This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.

This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.

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