Last Updated on Aug 29, 2022 by
Investing is a way to build wealth. But it’s not as easy as it seems to be. There are several concepts an investor needs to be aware of to make the best of their investment. For a beginner, it can be a big decision. Getting started with investing can be overwhelming. And it can take some time to learn and understand investment concepts. This article teaches about investment concepts a beginner should be familiar with.
Table of Contents
14 key investment concepts for beginners
Here are 14 key investment concepts you should know as a beginner. These are not just basic concepts but also essential ones which lays the foundation for your investment journey.
1. Financial plan
Having a well-crafted financial plan is the first and foremost step of the investment journey. These financial plans include buying a house, funding your child’s education, retirement savings, etc. These plans vary over time.
A financial goal will help you understand your investment requirements and choose the right investment accordingly. As there are different investment options like stocks, mutual funds, real estate, etc., you can pick the correct one according to your goal. If your financial goal is to buy a house in the next 10 yrs, you can pick a long-term investment option. With the fixed goal in mind, you can be devoted to it and keep an eye on the milestones to achieve the goal.
Setting your financial goals in the early stages of working days is advisable. You can seek a financial expert and plan on how to achieve the goals with your income.
2. Monthly cash flow
While setting a financial goal, as an investor, it is vital to know your monthly income, irrespective of your profession. You can be a full-time investor or part-time investor. In any case, you should have a precise idea of your monthly income and expenses. This will help you in planning your investments, savings and expenses effectively.
3. Risk and returns
Risk is an important parameter of an investment. Every investment comes with a certain amount of risk. Before picking an investment, investors must analyse their risk appetite, assuming the worst-case scenario and how much loss they can tolerate.
This investment concept can be a bit scary for a beginner, but it is vital to know that it is part of the investment. There are low-risk investments available, but the returns may not be as high as other moderate-high risk investments. Therefore while understanding your investment goal, analyse your risk appetite as well.
4. Returns
In an investment, risks and returns are tied together. Several investment options are associated with high risk and provide huge profits. If market conditions are not favourable, these high-risk investments can also fall and create a loss. But in the case of low-risk investment, the returns may not be as high as expected.
For a young investor, huge profit investments can be enticing. But it comes with a risk. However, for a beginner, it is essential to understand the working of an investment and the market before diving deep irrespective of the risk factor. You can follow the ‘slow and steady wins the race’ approach with your hard-earned money.
5. Compounding
Investments work with the magic of compounding. In compounding, your investment multiplies exponentially. In simple terms, in compounding, you will receive returns on your returns. Here’s an example to understand the power of compounding better.
Let’s assume that your initial investment annual amount is Rs. 20,000. If the interest rate is 10% per annum and compounded monthly, your money will grow as follows:
| Month | Principal (in Rs.) | Return rate | Amount returned (in Rs.) |
| January | 20,000 | 10% | 22,000 |
| February | 22,000 | 10% | 24,200 |
| March | 24,200 | 10% | 26,620 |
| April | 26,620 | 10% | 29,282 |
| May | 29,282 | 10% | 32,210 |
| June | 32,210 | 10% | 35,431 |
| July | 35,431 | 10% | 38,974 |
| august | 38,974 | 10% | 42,871 |
| September | 42,871 | 10% | 47,158 |
| October | 47,158 | 10% | 51,873 |
| November | 51,873 | 10% | 57,060 |
| December | 57,060 | 10% | 62,766 |
After a year, the return on your investment of Rs. 20,000 will be Rs. 62,766. It is evident how compounding works. The money keeps multiplying itself, and the returns are huge in the long term.
6. Investment strategy
As mentioned earlier, your investment strategy depends upon your financial goal. If your goal is to accumulate a good corpus of wealth for a later time, you can choose a gain-oriented strategy. If you are looking to generate income, then there are income-based investment strategies.
Also, you must be aware of strategies like an active and passive investments. As the name suggests, active investment means an investor must be active in buying and selling stocks. They act according to the market fluctuations. In contrast, a passive investing strategy is where the investor is not trading actively.
Irrespective of your investment stage (beginner or experienced), you need to be well aware of the investment strategies and their applicability to everyone.
7. Market capitalisation
This is for the investors looking to invest in stocks. Market capitalisation is nothing but the market value of a company. Public companies are categorised according to their market value. It helps an investor understand a company’s value and growth potential.
Companies with a market value of less than Rs. 5,000 cr. are small-cap companies, more than Rs. 5,000 cr. and less than Rs. 20,000 cr. are mid-cap companies, and more than Rs. 20,000 cr. are large-cap companies. In the stock exchange, these companies are ranked according to their market capitalisation.
You can calculate a company’s market capitalisation by multiplying the company’s current share price with the number of outstanding shares.
Alternatively, you can use Tickertape Stock Screener to filter the stocks according to the market capitalisation and other parameters.
8. Volatility
It refers to how much a stock’s price fluctuates. High-risk stocks tend to have bigger fluctuations, while low-risk or safe stocks are stable.
In publicly traded stocks, you can check for beta, a common measure of volatility. If the beta value is greater than 1, the stock is more volatile than the market. If the beta value is less than 1, it is less volatile than the market.
Though the beta value doesn’t give a complete picture of the stocks’ risk, it is one factor determining a stock’s risk.
9. Investment diversification
Once, a wise man said, “Don’t put all your eggs in one basket”. This applies to investments as well. You can diversify your investments in various options like stocks, real estate, bonds, etc.
For example, if you plan to invest in stocks, you can diversify between small-cap, mid-cap and large-cap companies. Not all companies perform the same way under different market conditions. When one stock falls, the other may rise and compensate you for the loss. It is a risk-management technique.
10. Asset allocation
This aims to balance the risk and reward of the investment by considering the investor’s age, goals, and risk tolerance. There are four main asset classes – fixed-income, equity, cash and real estate. The percentage of investment into these assets is termed asset allocation.
Diversification and asset allocation are connected. Diversification is a way of asset allocation. Asset allocation helps in determining the best strategy for investment in marketable securities. Whereas diversification is when the investor wants to expand the investment by investing a small percentage in different assets.
11. Buy and hold investing
As the name suggests, buy and hold investing is an approach where the investor buys a stock intending to hold them for a long time. This approach will help in taking advantage of the long-term stock market growth.
12. Investment costs
Any investment has several hidden fees on them. For a beginner, it is ideal to start reading the terms and conditions properly. This will help you avoid all the unnecessary costs which can cost you big later.
13. Uncertainty
There is no guarantee that a particular investment will perform well all the time. It may be good or bad now, but the growth predictability is uncertain after a year. Be mentally prepared even if your investment fails. Have an emergency fund set to help you during uncertain times.
14. Rebalancing
The process of investments doesn’t work like invest and forget. You must restore your portfolio once in a while to meet the target allocation. In simple terms, after a period of investment, you’ll dilute the underperforming assets and invest in the ones that show potential growth. Here the idea is to set risk control and to ensure that the portfolio is not dependent entirely on a single asset class for profit or loss.
Conclusion
Investing can be simple once you get hold of it. Understanding the fundamental concepts will lay a strong foundation. Apart from the concepts mentioned above, there are several other attributes that you need to know before picking an asset class. Before investing in any asset, you must have a good idea about the investment. For example, many people assume that investing in stocks is easy and provides high returns, but the stock market may not always be fruitful. It depends on several global factors. Overall, keep it simple and play safe till you understand better. You can take the help of a financial expert who can guide you with your investment.
FAQs
1. How to find the best stocks in India?
You can use Tickertape Stock Screener to find the best stocks in India. You can filter stocks according to different parameters like sector, market cap, price, returns, etc.
2. How to find the best mutual funds in India?
You can use Tickertape Mutual Fund Screener to find the best mutual funds in India. You can filter funds according to parameters like category, risk, returns and many more.
3. How to invest in stocks through Tickertape?
The steps to invest in stocks are simple which is as follows:
– First, open a Demat or trading account
– Log in to Tickertape
– Visit Tickertape Stock Screener and filter the stocks according to your requirements
– Pick the best stocks
– Click on ‘Buy’ and complete the purchase
4. Is it better to save or invest?
It depends on the individual. Savings are associated with no risk, but there is no growth. Whereas in investments, there is a chance to double your money, but it involves a certain level of risk.
5. For how long can we hold our investment in stocks?
Stocks are for long-term investments. There is no ideal investment period for stocks. It depends on your investment goal.
6. Is it a good idea to invest in stocks for retirement?
Though stocks are a good investment choice for retirement, it depends on the investor’s age. If you are close to retirement, investing in low-risk investment options like government bonds or fixed deposits is better, as stocks carry high risk.
7. Is it mandatory to have an emergency fund?
Yes. Emergency funds provide financial safety during uncertain times like job loss, medical expenses, etc.
8. Where can we save our emergency fund?
Your emergency fund can be saved in your bank account. Just ensure that you can avail the funds easily at the time of need.
9. How much should I save in the emergency fund?
Your emergency funds should have at least 3-6 months of your monthly income. It will help you in the case of emergencies like medical expenses, house repairs, job loss, etc.
As an insatiable reader and learner, I’ve spent the last two years exploring the world of finance. With my creative mind and curious spirit, I love making complex finance topics easy and fun for everyone to understand. Join me on my journey as we navigate the world of finance together!
