Investing 101: What You Need to Know Before Investing

If you want to achieve your financial freedom, investing should be an essential part of your life. After all, unless you already have enough money to be able to quit your job and live happily without worries, you need to make your money work for you.

This article will cover some basic concepts about investments, that are invaluable if you want to get started on the path to financial independence. 

1: Investing is for everyone

When you think about investing, what image comes to your mind? You might probably answer something like an office in Wall Street, with people wearing suits and ties in their offices looking at several graphs and charts. If you pictured investing as something that only Wall Street guys in suits can do, it's time to review your paradigms.

Although this image is not wrong, the fact that these guys in Wall Street are doing their business does not mean that only they are capable of investing. I consider that investing is for everyone, and any adult should know how to invest their money. With the technology available on the internet, investments are much more accessible than they were even 20 years ago. There is also a lot of information on investing that can help you make wiser investment choices, and it is all easily accessible, thanks to the internet. 

2: Investing is a Habit

You don't bake a cake once and call yourself a professional chef, right? The same logic works for everything else you do in your life, including investing. It is a habit that you grow with time, and, like any habit, investing requires some practice and a lot of studying before you get used to it. 

If you want to make investing a habit, you can start with a simple savings account with small interest payments, which is one of the safest kinds of investment. It's like swimming with buoys when you are a kid so that you don't drown the first time you go to the swimming pool. 

An easy way to start is to make it a goal to set aside a small percentage of your salary. It could be 10%, 5% or even less, but it is important to do it every month so that you can start investing. It might not be a massive sum now, but imagine what it will look like in 1, 2 or 5 years. Add compound interest to the formula, and it might surprise you. 

3: Investing requires research

Any form of investment requires a lot of research. You would rather not make any investment without knowing how likely it is to succeed, right?  

Therefore, before you start investing, be it stocks, cryptocurrencies, ETFs, or even a low-risk fund, do your research. Since we are talking here about investments in general, I will leave the specifics and detailed topics for later, but overall, the main things you should know before considering any particular investment are: 

1. How well do you understand this particular market?
2. What is the particular risk that this investment offers?
3. What is the expected profit? 
4. For how long will the investment give you returns?

Let's use Bitcoin as a simple example here with these 4 questions. If you are not a cryptocurrency expert, that is, if you are an average person who normally hear about Bitcoin from the news, the only thing you know so far is that it's always going up or down in record levels. In this case, point 1 is already a fail, which is why if you want to invest in Bitcoin, you should spend a huge amount of time understanding the market, the risks, and the possible returns before putting any money in it. 

By the way, I'd like to point out one thing: am I saying Bitcoin is a bad investment? No. I am saying that not everyone understands this investment well enough to make an informed decision. 

In conclusion, try to understand every detail about the investment you are about to make. It might not guarantee you returns, but you will definitely avoid losses by making sure you understand all the risks you are taking. 

4: Risk is an inherent part of investing

If we talk about investments, we have to talk about risks. Risk is an inherent part of investing, and the higher the promised returns, the higher the risk. It makes sense, right? If your money has higher chances of disappearing, then you should expect a higher prize for lending it. 

Think about that every time someone offers you a magic solution with high yields and no risk. They're either lying to you, or they don't fully understand what they are talking about. 

Once you are aware of this, you can understand better your own risk appetite, which means how much risk you are willing to take in an investment. Only you can know your risk appetite, but frequently you can divide it in a few categories: younger, experienced, older or inexperienced investors. Younger people, as well as experienced investors, are capable of taking more risks to grow their assets, while older people and less experienced investors should focus on maintaining their capital with lower-risk investments. 

5: Timing is essential

Whichever investment you make, timing is essential. It is crucial to stay up to date with the market news and understand the macroeconomic scenarios that might affect your assets. 

One great example from not long ago was the Covid-19 pandemic. If you invested in pharmaceutical companies before the pandemic, you would probably be able to cash out great returns on the following years. 

You can't know when a pandemic will strike, of course, but being informed is still useful. If you invested in airlines at the beginning, or during the pandemic, you would be able to cash out good returns as well when lockdowns became less frequent. 

It takes a lot of time to understand how everything influences the world's markets. Nonetheless, once you start paying attention to these things, you will find that it becomes easier and easier to predict how markets will react to certain news.

You don't need to understand these 5 things perfectly before you start investing, but you do need to be aware of them. This way, your first invested dollars (or euros, or any other currency for that matter) won't go to waste. In any case, start small, and scale up as you learn.