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Investing Basics 101 10 Basic Investment Principles that You Must Know!
Back to Basics of Investing
Passive income is money you don't have to physically work for. Your investment income from the stock market, real estate, and entrepreneurial endeavors are paying for your lifestyle.
Besides retirement, (which can seem like a long way off) having a passive income from your investments makes life more fun! You do what you want, when you want to do it and can afford the things you truly love to do. And if your gain some basic knowledge you can be enjoying the benefits fincial freedom has to offer while your still young.
So, what is your investment goal? The goal for many is to retire young and to live the lifestyle that you really want. Being financially free gives you the freedom to live the lifestyle of your choosing. On your quest to financial freedom you have a powerful force on your side called "compound interest."
Compounding interest allows you to make money off your original investment and you're making money off the interest the bank paid you. So, interest is calculated not only on the initial principal, but also on the accumulated interest that you are generating over time. Understanding the basics of investing will give you the ability to retire young and fully enjoy life.
What does this mean in dollars and cents? Learn to invest early! This allows compounding interest to grow bigger and faster than if you started investing when you reach twenty-five or thirty years old.
Learning how to invest - basic investing principles Now's the time to seize the day! Because sitting on your savings isn't going to help you in the long-run. Building a solid foundation of investment basics is important. In order to do so you must have some background knowledge and understanding of fundamental investment principles.
o Supply and demand - This concept is integral to investing. Supply is the amount of a product available at a given price, and demand is how many consumers desire that product. When more people want a product, supply prices go up. And when fewer people want that product, prices go down. This is true for real estate, stocks, and the products you buy every day like milk and bread.
o Assets and Liabilities - Easy as ABC. Assets produce income (for example, a rental property earns you rent) whereas liabilities cost you money (for example, cars). Buy assets, not liabilities!
o Length of investment - Time Value of Money is a way of calculating the value of a sum of money, at any time in the present or future. Basically, a dollar in hand today is worth more than a dollar that will be received in some future year.
o Rate of Return - Return on investment (ROI) refers to the percentage of profit or revenue generated from a specific activity. For example, one might measure the ROI of an investment by adding up the total amount invested (for example, $200) versus the return generated (in this example, $1,000). The ROI would then be 500% - good, huh?
o Cash Flow -The income generated through investments. Creating a monthly passive cash flow will enable you to earn money without actively working. Build up enough cash flow, and you decide how you want to spend your time.
o Leverage- The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.
o Capitalize on interest rate difference - If you can borrow money at 6% and earn 12% with a safe, low-risk investment, then you're on to a winner.
o Diversification - Whatever you're investing in, diversification is an investment strategy that reduces market risk by combining a variety of investments such as stocks and real estate, which are unlikely to all move in the same direction (up or down) at the same time.
Risk Assessment - Know Your Risks Before making any investment, it is important you understand the risks you face before you make an investment decision. There are several different types of risk that you need to be aware of:
Opportunity risk - When you are presented with a better investment option than the one you've committed your money to, this is referred to as opportunity risk. Because you are already tied up in a project, you will be unable to act on the new opportunity, and potentially lose profits.
Competition risk- Business owners experience competition risk as new companies entering the same market area take a share of the market.
Market risk - The uncertainty and movement of financial markets is termed as market risk. Changes in interest rates, tax base, and other factors all affect your potential return on the investment.
Once you've mastered these basic principles of investing, you will be ready to start the process of making your first investment! The sooner you start the sooner you can be enjoying financial freedom.
'Financially Free by 30' is a course developed by Vince Shorb. This multi-media, interactive course was specifically designed to give young adults the financial education necessary to achieve financial freedom while they are still young. The course and free video lessons can be found at www.FreeBy30.com.
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