The financial market is so complex that if I am to break it down, you will likely get confused. If the financial market is this complex, how can we make money from it or even invest in it?
Before we can proceed further we will analyze a bit about this financial market.
What Is The Financial Market?
When we say the financial market, we are literally talking about a place where people buy and sell asset and financial instruments.
Assets and financial instruments such as stocks, currencies, treasury bills, bond, etc. Are traded on different exchange round the world and when this various exchanges are brought together, they made up the financial market.
CHECK OUT: What Are Shares in the Stock Market?
What is investment?
When we hear the word investment, what comes to our mind is a scenario where Mr. A gives his money to Mr. B and Mr. B pays interest or fee to Mr. A. Though that may be the primary definition of the word “investment” but for the sake of this article, I will show you people the two types of investments we have.
The first kind of investment is the type where an individual either gives a company, cooperation, bank etc. his money and receive interest monthly or annually such type of investment is seem in saving account where the banks pays interest or in stocks where you will receive dividends.
The second type is, where instead of putting your money in a company to be receiving interest or dividend you just buy either a commodity or a pair of currency and expect the price to go higher thus making profit.
No matter the type of investment, you can still make profit from the financial market.
NOTE: there is a difference between SPECULATION and INVESTMENT: speculation involves buying an asset or a financial instrument for the purpose of holding it for a shorter period where as investment involves holding for a longer period of time while increasing the number of assets in the portfolio over time.
We have seen how the financial market works and types of investment involved so let us get straight into “how to invest in the financial market”
We will look at, how we can invest in stocks, bonds, commodity and currencies.
This is one of the markets, where we have many participants because this is where companies and corporation go to source funds for expanding by offering ownership of the company in exchange for funds.
Investors profit, when the company earnings increase and it requires a bit of knowledge to know the right company to buy shares.
To dive into the stock market, you need to know what stocks are and how they work. The stock market is one of the best markets to invest in according to Peter Lynch “Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it”.
Another example of a financial instrument that we can invest in is bonds. Let me explain a bit about bonds. Bonds are sometimes called debt market, this is because participants of this market buy and sell debt securities. I know you might probable be confused let me give an example, lets save the Federal Government of Nigeria needs $1Billion for some governmental projects.
The Central Bank of Nigeria will issue a Federal Government bonds to the primary market, which will later be traded in the secondary market. Participants such as me, you and other big institutions can purchase this bond –so in shorter definition we are lending the government capital.
There are other types of bonds such as corporate bonds (issued by companies and organizations), Government bonds (issued by national governments, municipal bonds (issued by cities and states), Bond indices (can be bought on exchange floors).
Government Bonds are less risky, so you are sure of getting your interest and capital back.
Commodities can be defined as objects that come out of the earth such as Gold, Copper, Oil, and Wheat etc. Though not all commodity can be traded by retail investors like us there are some popular ones such as Gold, Silver, Oil, platinum.
Each commodity is driven by demand and supply which is influenced by the economy of the country that produce them or uses them forex if the United State Dollar is increasing in value the price of Gold will decline.
We can use this information to our advantages unlike stocks and bonds, commodity needed to produce other matrials such Oil that is used to produce derivatives such as diseal, Petrol etc and that makes them a great market to invest in.
The Currencies are the most traded market in the world having a daily transaction of more than 3.5 Trillion Dollar. Unfortunately, so many people fail because they speculate this market instead of seeing it as an investment.
Each currency pair such as the EURUSD – which is the one of the most traded currency pair. Are greatly influenced by geo political, financial policy, Demand and Supply. If you can study these figures and pattern with the right period you can buy at a certain level and watch the price soar in your favour.
Things to Consider When Investing:
Below are some of the things you should greatly consider before you start thinking of investing. The ugly truth is that investment is not for everybody, there are some who would still prefer to speculate rather than to invest.
One of the reasons why we have few people investing in the financial markets is because “majorities do not have the knowledge”. It is one thing to know, how the Foreign Exchange Market generally work and another to know how to make money from it consistently.
Before you invest on any assets, you need to take a minimum of 3 months to understand the basics, the process, the Dos and Don’t, read books about it and most importantly ask questions, so that you can be fully prepared.
Capital serves as a major blockage to potential investors. Investing requires capital; some requires more capitals than others, one of the ways to build your investment portfolio is to start small.
CHECK OUT: What Are Indices in Forex
You can start from the little fund you have by buying stocks that are not to expensive and keep adding to it as time goes on.
There are some inexperience investors who have large capitals to spare but ends up wasting them, because they do not have a proper risk management in place.
It is useless to drop in thousands of dollars into bonds when you can diversify your portfolio. Example you might buy shares in two reputable companies, buy few ounces (lot) of gold, short the USD, and use the rest on bonds, than to invest it all on one asset.
This is the main reason why people do not like investments and prefer speculation instead -because of the duration involved.
Investment on a particular financial instrument requires a great deal of time for the asset to either gain value or lose value depending on the investor’s predefined direction.
Just as the Warren Buffet said “if you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes”
Investing is about minimizing risk to generate wealth over the long term
In summary, it is advisable to start investing at an earlier age just like Warren Buffet who started investing at the age of 11 and he is now among the 10 richest people in the world.
Though investing does carry some risk but it cannot be compared with speculating –which is more risky. With the Right Knowledge and Risk Management, you will have an advantage.
There are many assets to invest in and not just Stocks, Bond, Commodity or Currencies. We have Real Estate, Treasury Bills, Options, Saving Account, Mutual Funds, etc. just that theses might be a little expensive and for not too suitable for inexperience investors.
Are you already and investment or do you wish to invest in the financial market, please do comment below I will love to hear from you.