Investing money can be a confusing and overwhelming concept for many people. As a matter of fact, understanding the financial market is quite complex, as well as its constant swings make the outcome of any investment unpredictable, so everyone should be aware of the risks involved. There are so many reasons why people might choose to invest their money, and even more reasons why they might not.
However, by understanding the reasons behind why people invest, it may help to demystify the process. In this article, we will explore some of the most common reasons why people choose to invest their money, as well as examine some of the most popular financial and non-financial instruments among investors.
Why people invest?
As mentioned earlier, the reasons underlying any type of investment are manifold, and they vary depending on each individual’s profile, needs, and goals. But what are the most common reasons for people to embark on an investment path?
Building wealth
People decide to invest to potentially build wealth over time and to fulfil certain goals, such as starting a business, supporting financially children or grandchildren, etc.
Depending on the investor’s profile and budget, by investing small or large sums in assets that have the potential to grow in value, such as shares, ETFs or mutual funds, investors may have the chance to reach their goals. In any case, it is crucial to remember that investments carry risk, as the outcome will solely depend on the performance of the assets.
Saving for retirement
Some people think about investing as an opportunity to have an additional income aside from the State pension in order to build a pension pot.
Among the popular options there are personal pensions, which involve the payment of periodic sums of money that then will be invested by the pension provider in diverse financial instruments, such as stocks, bonds, EFTs, ISAs and much more.
A hedge against inflation
Inflation refers to the overall increase in price level of goods and services. If there is inflation over a period of 30 or 40 years, the money will be worth less while the cost of living has grown. That’s why many people see investments as a way to beat inflation: if interest earns more than the inflation rate, in certain cases it may be possible to outperform inflation.
What to invest in right now
Another common questions that people have when they are considering investing is what to invest in right now. As mentioned above, there’s no a single and standard answer, as it will depend on the individual’s goals, risk tolerance, and investment time horizon. Some of the most popular types of investments include:
- Stocks, i.e., shares in a company, that allow investor to be entitled to a portion of that company. When a company is doing well, its stock price will usually increase, allowing investors to make a profit. However, stocks can also be risky, as the value can decrease if the company is not performing well.
- Bonds are a type of fixed-income investment, meaning that they pay a fixed rate of interest over a set period. These are generally considered low risk investments, but they offer low returns.
- Real estate is another common investment. Rental properties, in particular, can provide a steady stream of income, and the value of the property can appreciate over time. However, real estate investing also comes with a variety of risks and responsibilities, such as property management and maintenance.
- Mutual funds are a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of stocks, bonds, and other assets. These are managed by professionals, however, also in this case there are risks to take into account. As a matter of fact, there are no guaranteed returns.
- ETF, Exchange Traded Funds are similar to mutual funds, but they trade on an exchange like stocks. They offer a cost-effective way to invest in a diverse range of assets. The price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. This is unlike mutual funds, which are not traded on an exchange,
- Cryptocurrency is a digital or virtual currency that uses cryptography for security, and it operates independently of a central bank. Investing in cryptocurrencies is risky, as the value can go up as well as fall, causing losses.
Conclusion
As we have seen, the reasons behind investing are manifold, as they depend on the goals and on the profile of the single investor. By consequence, the investment vehicle chosen by the investors vary according to that given financial profile and to the risk one is willing to face.
Whatever the choice, however, it is crucial to underline that every investment carry a certain degree of risk, and past performance is not a guarantee of future results.