What is Investing? How to Invest?

Hello there! Today I want to talk a little bit about investing.

Are you interested in becoming an investor to put your money to work for you but don’t know how to get started?

If you are a beginner investor, it can be very difficult to understand where or even how to start investing. Investing can be complicated and can seem scary if you haven’t done it before. Maybe you feel this way because you think you need a lot of money or you’re not sure what the best investment is. Don’t let this fear stop you from taking advantage of the opportunity to grow your money.

Investing is a topic that can touch everyone’s life in today’s economy because it is no longer enough to just save money; it is also important to invest your money wisely, without losing it to inflation. That’s why everyone has to start investing somewhere, and that start is usually a humble one.

Investing is more than just saving money for the future. Investing is all about setting realistic investment goals and then creating a plan to help you achieve those goals. In fact, this plan is a wealth-building plan. Fortunately, there are plenty of investment options and tools to help you get the job done. We’ll cover them all in this guide.

Ready to learn how to invest? In this investing guide, we have told you everything you need to know to start your journey towards financial freedom as an investor. I know and understand that even with a comprehensive guide like this one, learning how to start investing is not simple. It is a long process with a lot of learning and you will face challenges on your way to becoming a successful investor. You will probably make mistakes along the way, but you shouldn’t let a few bad investments hold you back.

So let’s get started!

What is an investment?

Actually, we are talking about something very simple. Investing is the business of using your money or assets today to make them more valuable in the future. So in a way, you are leaving a gift from you today to your future self 😊😊

To put it briefly, investing is the business of putting your assets (money, real estate, commodities, etc.) somewhere in the hope that they will gain value in the future, and using them for a purpose.

So why should we invest?

To Provide Economic Security: As you know, in the hustle and bustle of daily life, we all worry about the future in one way or another. One way to reduce these worries and feel more secure in the years to come is to invest our savings today. Beyond just “saving”, we can protect and grow our assets by investing.

Reducing the Impact of Inflation: Saving is good, but just keeping your money in the bank can erode it in the face of inflation. When you direct it to an investment instrument, you can prevent your money from melting over the years. With the right investment strategy, your money will be more resistant to economic fluctuations.

Opportunity to Achieve Goals: We all have goals we want to achieve in life, don’t we? Maybe owning a house, starting a business, or securing our children’s future… By investing, we can approach these dreams faster and more securely. Remember, investing is a marathon; long-term thinking is the key to success.

Financial Freedom and Passive Income: Many people today are interested in passive income sources. Passive income is a type of earning that brings you income even when you are not working. For example, dividends from stocks or a rental property investment can provide you with a steady stream of income. This is a great advantage on your path to financial independence.

Gain Financial Awareness: When you embark on an investment journey, you also develop financial literacy. Understanding market fluctuations, recognizing opportunities and being aware of risks enriches the investing experience. In this way, you learn to manage your money more consciously.

What Should We Consider When Starting to Invest?

When you decide to invest, it is very important to first set your goals and understand your risk tolerance. Everyone’s risk profile is different; some of us prefer safer investments, while others may be more open to taking risks for higher returns. Therefore, finding the right instruments for your expectations and goals is the first and most critical step in this journey.

Remember, investing is a long-term process and requires patience. Over time, as your efforts pay off, you will realize how valuable the steps you take on this path are. In other words, investing is like a thank you letter from your present self to your future self. Are you ready? 😊

When Should You Consider Investing?

We can say that beginners should ideally start investing only after fulfilling the following two important points.

a) Clear your high-interest debts before putting money into investments: The interest rate on your loan or credit card debt will almost always be higher than the return you can consistently earn on an investment. If you have significant loan or credit card debt, the smartest investment would be to pay it off first.

b) Build up an adequate emergency fund: You should have an emergency fund (savings) set aside to cover your living expenses for at least six months.

What is the Difference Between Investing and Saving?

Although investing and saving are often mentioned together in financial terms, they are actually two very different concepts. Not confusing the two is crucial to achieving your personal finance goals. Let’s see the differences more clearly.

Difference in Purpose and Focus: Saving means setting aside a portion of your current income, i.e. cutting back on or controlling your spending. In short, you save the money you have today with the goal of preserving it rather than spending it. Investing, on the other hand, is done with the goal of utilizing and growing the money you have saved. You use investment instruments to protect the money you save from factors such as inflation and to increase its value over time.

Risk and Return: Saving carries almost zero risk. We generally refer to money held in a deposit account at a bank or physically saved as “savings”. While risk-free is an advantage, over time this money can lose value in the face of inflation. Investments, on the other hand, usually carry a certain amount of risk, but also offer a return in return for that risk. Investments such as stocks, real estate and bonds have a high return potential, but these gains usually come in the long term. In other words, investing is the desire to make a profit by taking a risk.

Maturity Period: Savings are ideal for short-term goals. For example, it makes sense to save to go on vacation in 6 months or to build an emergency fund. Saving provides security for immediate needs. Investing, on the other hand, usually requires long-term thinking. You can invest for long-term goals, such as building up a retirement fund, children’s education or saving for a large investment in the future. This is a way of making money grow over time.

Financial Awareness and Management : Saving is a habit that most people see as the first step in life. Setting aside a portion of income is risk-free budget planning and generally does not require financial knowledge. Investing, on the other hand, requires more conscious financial management. Because when investing, it is important to know the market, inflation, interest rates and the characteristics of investment instruments. In short, investing is an excellent opportunity to improve your financial literacy.

Risk and Return in Investing: The Two That Go Together

There is one issue that often comes up when investing: The relationship between risk and return. You may have heard of these terms, but let’s explain it with some more examples.

Risk and return are actually inseparable. When investing, we can say that there is a rule that “the more risk you take, the higher your return potential”. Of course, a high return potential does not mean a guaranteed return; taking a risk always means taking a chance. Let’s explain this relationship a little more with some examples.

Example 1: Stocks

Let’s say you are considering buying shares in a company. Investing in stocks is considered high-risk as it is very vulnerable to instant price fluctuations on the stock exchange. However, as the company grows and gains in value, the share price will rise, giving you a nice return. For example, if you invested in a fast-growing company in technology and things go well, the share price could multiply. But if the opposite happens, share prices can fall and you risk losing some of your money.

This example shows us this: With equities, high risk comes with high probabilities of winning or losing.

Example 2: Government Bonds

Now let’s look at a low-risk example: Government bonds. These investments are issued by the government and have a very low risk. Government bonds offer a fixed return after a certain period of time. This means they don’t offer the prospect of a huge return, but they do provide almost guaranteed appreciation of your money. For example, if you invest in a government bond yielding 3%, your annual return is fixed and the risk of suffering large losses is very low.

In this case, low risk means low return, but it is safe and protects your money.

Example 3: Investing in Real Estate

Real estate is an interesting example. If you buy a house or a business and rent it out, you can earn a regular rental income every month. Real estate usually carries a moderate risk because its value increases more slowly. However, it is attractive for many people because it is possible to earn passive income by renting it out. On the other hand, real estate prices may not always increase or may fall unexpectedly, so investing in real estate also involves a certain amount of risk.

In the case of real estate, we see a moderate level of risk and a regular, moderate return.

As we have seen in these examples, the balance of risk and return is one of the most fundamental aspects of investing. Think of it like a balance scale: Risk on one side and return on the other. The higher the risk, the greater the potential for the return to increase, but also the greater the potential for loss. So it is very important to find a balance according to your risk level and goals when investing. Each type of investment responds to different investor needs with a different risk-return balance.

Remember, the right investment is the one that best suits your risk tolerance, goals and financial situation.

How Can We Reduce Risks When Investing? What is Asset Diversification?

Keeping risks under control is as important as making gains when investing. It is not possible to eliminate risks completely, but with some strategies we can at least minimize losses. This is where we come across a concept we often hear: Asset diversification.

What is Asset Diversification?

Asset diversification means spreading your money across different investment instruments rather than tying it all up in one place. In other words, it’s a “Don’t put all your eggs in the same basket!” strategy. You don’t want all your eggs to break when you drop the basket, right? The same logic applies in the investment world. If you put all your money in one investment vehicle, your entire portfolio will be affected when that investment performs poorly. But by spreading your money across different types of assets, you can reduce your losses and manage risks better.

How to do Asset Diversification?

Let’s explain the asset diversification strategy with a few examples:

a) Investing in Different Investment Vehicles: Let’s say, instead of investing all your money in stocks, you invest some of it in bonds, some in gold and some in real estate. In this case, even if there is a fluctuation in the stock market, your losses will be lower due to your more fixed-return investments such as bonds or gold.

b) Sector Diversification: You can allocate your stock investments to different sectors, not all in the same sector. For example, by investing in the shares of companies from different sectors such as technology, health, food, etc., you can protect yourself from any negative developments in any one sector. Thus, even if there is a decline in the technology sector, you can earn a more balanced gain thanks to your investment in the health sector.

c) Domestic and International Investments: Instead of focusing your investments only on local markets, you can also open them to foreign markets. For example, you can invest in some global companies or foreign currency bonds alongside your investments in Turkey. This way, when local markets are volatile, your overseas investments will help you build a more balanced portfolio.

What else can we do to minimize risks?

*Think Long Term: It is important to think long-term when investing to avoid being affected by short-term fluctuations. There are momentary ups and downs in the markets; with a long-term perspective, you will be less affected by these fluctuations.

*Regular Monitoring and Research: Staying informed about the markets and reviewing your investments regularly prepares you for unexpected risks. In this way, you can update your positions according to market conditions and build a more robust portfolio.

*Create an Emergency Fund: Apart from your investments, it is a relief to always have an emergency fund. This fund provides you with the cash you need in unexpected situations without disrupting your investment. Thus, you can stick to your long-term investment plan without being affected by market fluctuations.

*Conscious Risk Taking: Everyone has a different risk tolerance when investing. Understanding your own risk profile allows you to create an investment plan that is less stressful and suitable for you. For example, if you prefer safer investments, low-risk bonds or mutual funds may be suitable for you. If you are a risk-taker, you may want to go for stocks or cryptocurrencies. The important thing is to know your risk level and take steps accordingly.

In summary, it is possible to manage risks through asset diversification and a careful strategy. Of course, there is always risk when investing, but you can protect your earning potential by allocating this risk wisely and managing it in a planned manner. In short, if you want to take firm steps in the investment world, make sure you put your eggs in different baskets! This approach will give you a more balanced, secure and satisfying investment experience in the long run.

What is Active Investing and Passive Investing?

There are two important strategies when investing: Active investing and passive investing. Each has its own advantages and disadvantages, so understanding which one is right for you can make a big difference in achieving your investment goals. Let’s get to know these two strategies more closely.

Active Investing

Active investing is a strategy that aims to constantly monitor the market and quickly seize opportunities. Active investors make quick decisions based on market movements, buying and selling stocks, assessing sectoral trends and regularly restructuring their portfolios. This approach is known as a strategy that aims for short-term gains and capitalizes on market fluctuations.

Advantages of Active Investing:

*High Return Potential: It offers the opportunity to generate high returns in the short term by analyzing the market well.

*Flexibility: You can take advantage of earning opportunities by quickly changing positions according to market conditions.

*Evaluating Opportunities: Active investors have the chance to evaluate sudden opportunities in the markets.

Disadvantages of Active Investing:

* Time and Information Requirement: Continuously following and analyzing the market is time consuming and requires knowledge.

* High Costs: Frequent trading can cause costs to rise by increasing commissions and transaction fees.

*Risk Level: Trades that aim for short-term gains involve higher risk, so the risk of loss is also higher.

Passive Investment

Passive investing is a calmer investment strategy that takes a long-term view. In this method, investors prefer to hold the assets they invest in for a long period of time rather than following the market closely. Passive investors usually invest in investment instruments that are representative of a specific market, such as index funds, and leave this investment for the long term.

Advantages of Passive Investing:

* Low Costs: Since passive investing does not involve frequent trading, transaction costs and commission fees are lower.

* Less Stress: It provides a less stressful investment process as you do not need to follow the market constantly.

*Long Term Stability: Aims for long-term growth without getting caught up in market fluctuations and reduces risks.

Disadvantages of Passive Investment:

*Lower Return Potential: Since it provides a stable return rather than quick gains, the opportunity for high gains is more limited.

*Dependence on Market Performance: Since passive investors follow the overall performance of the market, the portfolio may be negatively affected when the market declines.

*Opportunity Seizing: Carries the risk of not being able to take advantage of instant earning opportunities in the market.