Learn what investing is, what different types there are and why it should matter to you.
Definition: An investment is an asset with the goal of generating a return in the future either through income, interest or an increase in the value of the asset.
Let’s unpack this:
Now, when you invest, you are acquiring an asset and this always requires some sacrifice. In other words, you are giving up something now, such as money, time or effort, to get that asset. In the financial world this is usually money, like when you exchange your cash for a share or a note in a company, but it can also be time and effort, like when an entrepreneur spends years to build their business.
This also implies that there is risk involved because it could turn out that the investment will not be worth what you paid for it. It might not generate the income you had anticipated or the value of the asset went down over time instead of up. And you could even lose all of your investment. Since we don't control everything and the future can be unpredictable, all investing bears a certain degree of risk, but not all investments come with the same risk. We’ll cover this more in the risk section because risk and return tend to be highly correlated: Investors generally expect higher returns from riskier investments.
The overused stock picture for investing is not accidentally a seed growing into a plant. Because that is exactly what you can compare it to: investing is planting seeds with the hope that they turn into large plants or trees that keep giving back to deliver you a great harvest every year.
So investing provides us the opportunity to put some money aside and grow that money over time, giving you the ability to create your financial security for your future.
Quick Quiz: Let’s say you put aside 1.000 euro today and have the opportunity to invest it for 30 years with an average return of 8% per year. What would your investment be worth in 30 years?
10.063 euro !!! So your money increased 10 fold… This really shows you the power of investing because there is the compounding effect: you also start returning a return on the returns that you made in the years before, not just the original 1000 euro investment. Einstein even called this effect the eighth wonder of the world!
Now when you add discipline and consistency to it, it gets even better: Let’s say you put aside 250 euro per month and have the opportunity to invest it for 30 years with an average return of 8% per year. What would your investment be worth in 30 years?
573.471 euro !!! Well, that is a nice amount to enjoy…
Now what if you start earlier and you did that for 40 years:
872.752 euro !!!
So we hope this shows the importance of investing for your financial future. We did say earlier that there was risk involved, but luckily there are ways to reduce this risk to a minimum while still aiming for strong yearly results like above. We’ll discuss this at the end when we draw the most important lessons on investing.
When you invest in stocks, you’re basically buying a small piece of a company. In other words, you become a co-owner or shareholder in that company and it lets you participate in its gains or losses. There are two ways in which people hope to make returns when investing in stocks:
- An increase in stock price while they own the stock, so that when they sell they’ll profit from the gains on the sale. Stock prices tend to go up when the future of the company is increasingly looking more bright but they can also go down when the company is facing headwinds.
- Some companies distribute profits to all shareholders through dividend payments. Note that not all companies issue dividends and it is fully up to the company to decide if and how much they distribute. There are a lot of companies that don’t pay dividends and reinvest any profits in the company’s growth and development.
When you invest in notes, you’re lending money to the note issuer which can be a government, a company, or other institution. In return for your investment, the note issuer is obligated to pay you a fixed rate of return, the interest, as well as the money you initially loaned them.
You can invest in real estate by buying a home, building, office spaces, land or a forest. Just like with stocks, there are two ways in which people hope to make returns when investing in real estate:
- The gains you make receiving rental income and after deducting all the costs like maintenance, taxes and mortgage payments.
- An increase in the value of the real estate over time.
Cryptocurrencies like bitcoin, dogecoin, solana,.... are digital assets people use as investments and/or for online purchases. We could easily spend an entire series of posts on all the details and the different types of cryptocurrencies, but in essence, when somebody invests in crypto by buying coins on an exchange (eg. Coinbase or Binance), they are basically hoping that in the future somebody else will pay more money for those same coins. Important to understand is that they do not produce any output and profits like stocks and real estate. You are just hoping the value goes up.
Besides the assets above, there are many others like: commodities, gold, currencies, certificates of deposits and complex financial instruments like options and futures. Those tend to be more complex, so definitely educate yourself well before attempting any investments in those areas.
The safest way to hold your money is to keep it stored in a bank account that is insured by the government, so in case the bank goes bankrupt, the government would ensure you do not lose (all) your money. Unfortunately, there is little to no return on money kept on your bank account. So no risk means little to no returns.
So if you want a return on your money you will need to invest, and investing comes with risk. There is no way around that. This said, different investments come with different levels of risk. Typically, higher risk comes with higher return because the investor will want to be compensated for the higher risk they are taking.
So when you decide to invest, it is important to understand your tolerance for risk. Generally your risk tolerance depends on your horizon: will you need your investment for something else (eg. Holiday trip, buying a house, starting a business,...) in the next few years? The further off your horizon, the more risk tolerant, because you have more time to recover from any dips or recessions. For example, the stock exchange sees regular crashes like recessions and depressions, but over the long haul it has always provided solid average returns of 7-8% per year. But if you had invested for short-term and needed your money during one of those dips, you might have seen heavy losses on your investments.
Another important strategy to mitigate risk is diversification, which will cover below.
Luckily, getting started as an investor is relatively simple today and you also do not need a lot of money either, you can start small and build from there. Start with some homework and explore different options:
Regardless of what you want to invest in, where you want to invest or how you want to invest, there are a few key principles to keep in mind and that get you very far in being a successful investor:
Unfortunately that same simplicity and accessibility that has been developed for investing in stocks, notes and other asset classes, just did not exist in real estate. You could not just buy a small part of a property in a minute, like you can for a note or stock.
You needed to go through a complex process of months and invest a large amount of money to buy an entire property.
With Brxs, we are aiming to change that. We want people to have the ability to diversify their investments with real estate, benefit from steady interest and in the long term inflows from rental income and potential appreciation over time. You can check out some of the investment properties on our platform here, or dive deeper into our education sections on real estate: Why invest in real estate? , How to invest in real estate? , How do you earn money in real estate? [coming soon].
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