The Fundamental Principles Of Investing
The Fundamental Principles Of Investing
Irrespective of age , status, experience etc., learning the basics of anything is very important. Most people learn the basics before investing whereas others do not, resulting in risking their hard-earned money. Usually, there are two major motives on the mind of every investor, whether an expert or not. First is for security and second is for comfort. These two plans complement each other as long as investing is concerned. These two plans must be in place before one begins investing his money, and the need to experiment and learn more exotic techniques using different investment patterns.The need to know the kind of income one is working for is indeed crucially important. There are different kinds of income. Earned Income, Portfolio Income, and Passive Income. Income derived from a job or some kind of labor, for instance, income from a paycheck is "Earned Income", it's highly taxed and it's the hardest income with which to build wealth. The income derived from paper assets such as stocks, bonds, mutual funds etc. is known as "Portfolio Income" and by far, it's the most popular form of income, simply because paper assets are much easier to manage and maintain than any others. The income generally derived from real estate is known as "Passive Income". It can also be income derived from royalties, patents or license agreements. But over 80% of passive income is generated from real estate, and there are many tax advantages available for real estate.Quite unfortunate, most people, including professionals do not know the difference between Security and Asset, not to talk of Liability. This is an area where most investors get confused. In order to achieve success in investing, one needs to keeps his hard-earned money secure by purchasing a security he hopes converts his earned income into passive income or portfolio income. All securities are not necessarily assets as most people think. A security is something one hopes to keep his money secure. Generally, securities are bound up tight by government regulations. This is the reason why the organization that watches over much of the world investing is called Securities And Exchange Commission (SEC).The government knowing that all it can do is maintain a tight set of rules and do it's best to maintain order by enforcing those rules. It is not a guarantee that everyone who acquires a security will make money. That is the reason why securities are not called assets. An asset puts money in one's pocket or the income column, whereas a liability takes money from one's pocket and displays itself in one's expense column. It's just a matter of basic financial know-how in order to differentiate them. This confusion starts up for most investors when someone tells them that securities are assets. For this reason, average investors are scared of investing knowing that just buying a security doesn't guarantee making money. The problem with buying a security is that the investor can also lose his money.However, if a security makes money, it puts money into the income column of the financial statement, and it is an asset. But if it loses money and the event recorded in the expense column of financial statement, then that security becomes a liability. For instance , one buys two hundred shares of stock in a company in June for which he paid $5 per share. In July, he sold fifty shares for $8 per share. Those fifty shares of stock were assets because they generated income for him. But in September, he sold fifty share of stock for only $3 per share. That same stock had become a liability because it generated a loss (expense). So, it is actually the investor not knowing the difference between an asset and a liability that makes investing risky.Surprisingly, it may sound common or uncommon to note that the investor is the asset or liability and not the investment or security. Most people always lament that investing is risky, it is the investor who really is risky. He is the actual asset or the liability. Has one really asked himself "Why do most so-called investors lose money when everyone else is making money?" That's simply because they do follow the fundamental principles in investing. That's the more reason why every good investor should follow behind a risky investor because that is where the investment bargains can be found, in addition to listening always to unsuccessful investors in order to find out the cause of their mishaps so as to re-position and reinforce oneself against unforeseen circumstances.A non-investor always tries to predict what and when things will happen, which is one of the primary reasons why most investors are unsuccessful. They always regret missing great opportunities, which they wouldn't have, if they had overcome their negative thoughts. Always crying blues and telling stories of how they lost their chances of becoming world's billionaires. But a true investor is always prepared for whatever that happens. That's where the phrase "Take the risk and join the millionaires" comes into play, which indeed is a reality. Though that there's always a narrow window of time and opportunity available in most investments that would make one become rich. But regardless of how long the window of opportunity remains open, if one is not prepared with education, experience and extra cash, the opportunity, if it's so good, will definitely pass him by. The question now is "How does one prepare?" To be focused and keeping in mind what other people are already looking for. Whatever it is, be it stock, real estate, mutual fund, security etc.. It all begins with training one's brain to know what he is searching for and being always prepared for the moment the opportunity will present itself.Literally, being prepared means having the education, experience and finding a good deal. One will find the money and the money in the other way round will find him too. Good deals (businesses) seem to awaken the giant in every human being. When one finds a good deal, the deal attracts the cash, if the deal is bad, it will be practically very hard to raise the cash. Most times , good deals did not attract the cash. Not actually the good deals were no longer good deals, rather, the controller of the deal did not attract the cash. By implication, the good deals would have been very good if the controller had applied caution. For instance, in real estate, people always believe that the key to success is the location, but in reality it is always the people in the world of investing irrespective of the type. Quite often, best deals become worst deals simply because they are controlled by inexperience investors who always lose their money and that is the reason why there is Securities And Exchange Commission.The Securities And Exchange Commission's main job is to protect the average investor from these bad deals. The primary aim of investors is to ensure that their money is secure, and taking the next step to do their best in converting that money into cash-flow or capital gains. It's then, they would find out if they or the people they entrust their money with, can turn that security into an asset or a liability. Again, it's not the investment that is necessarily risky, rather, it is the investor. Investing is only a subject one can learn its basics for the rest of his life. The good news is, the better one is at the basics, the more money he makes and the less risk he has.Considering an investor having two basic investment plans in place, one of the plans is doing very well and it happens that he has an extra cash of $50,000 he can invest in any other business without minding the consequences i.e. whether the business will fail or survive. Knowing very well that if the business failed that he would still put food on his table in addition to taking care of other priorities without minding. This is where the Risk And Reward Evaluation comes into play. It's also known as the Risk-To-Reward Ratio. For instance, let's say one has a brother that has an idea for a Pizza stand. His brother needs $50,000 to start. The investor now begins to evaluate the risk and rewards involved in opening a Pizza stand. He begins to question himself "Would this be a good investment?" It could be, emotionally, it could not be financially. Too much risk but not enough reward is involved. The next question, "How would one get his money back?' The most important thing here is the return of investment as security of capital is very important. Though his brother has an expert knowledge about Pizza and has been working for a very big Pizza company for over a decade, but now, wants to start his own. Definitely, there is more reward for the same amount of risk involved.
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