Investment: What-how-why?


Investment: What-how-why?

Bonds, Entrepreneurs, Eurozone, Investment

August 4, 2019

February 13, 2020

MS Islam

Have you ever planted a tree or a
seed? Does the tree grow overnight? No way, the tree takes a long time to grow
gradually and also requires a lot of nurturing. When the tree becomes large
enough, you don’t have to nurture it anymore and it would then become an asset
for you.

Imagine the opposite situation. If
you had left the seed aimlessly, it would not have become a tree and the seed
would have been a waste. This is scenario is exactly similar to that of
investing money. If you keep the money to yourself, they won’t grow and in time
due to inflation, they might be of no use!

What is investment?

Investment refers to putting money
in stake for something or buying an asset in the sector that has potential of returning the
invested money with some profit. It could imply the increase of asset or
regular stream of income.

Invest for the future gain; Image Source; benisonmedia.com
Many people often confuse
investment with saving. Saving is nowhere close to investing. Saving is the
mere keeping of your current investment, whereas investing is the move for
anticipated growth of your money. Keeping cash in bank account is not
investment. Investment is buying an asset with potential of future growth.

Note carefully, the money that
lies idle is not investment. Investment is the process that is going to utilize
your money to grow the amount. Many people buy gold ornaments and preserve them
hoping that the price of gold would increase in future. This is not an
investment because, while the price of gold is increasing, price of money too
is decreasing for inflation. The primary
quality of investment is the potential to grow your money overlooking the
inflation.

Now, you might think that
investment would potentially pose some risks for your money and you might loss
all of them, while saving would keep the money intake. This thought is common
among general people who don’t know the hazards of saving money and not
investing. Let’s discuss about them.

1. Inflation

Inflation is the biggest threat to
savings and it is the primary reason which makes investment a compulsory option.
Inflation effectively reduces the amount of your saved money over a period of
time. Does is sound crazy? It might, but it is true. The number might remain
similar but you’ll lose purchasing power which means you’ll lose money.

An example here could make things
clearer. Say you have 100 dollars and you want to save it for 5 years.
Currently, you can buy 10 burgers with this money. But, inflation will cut up
the purchasing power and after 5 years, you might be able to buy no more than 5
burgers because of price hike.

With the same amount of money,
you’ll be able to buy half amount of product. If you want to buy 10 burgers 5
years later, you might need 100 more dollars. What does it mean? It means after
5 years, you are essentially lacking 100 dollars from your wallet! Oh wait,
isn’t that the whole amount of money you are willing to save?

Now think otherwise. If you had
invested the money, you might have earned some returns. And, over the period of
5 years, you’d have the same purchasing power if not more. The whole that would
have been made in your wallet wouldn’t happen if the money didn’t lie idle.

That’s why even savings account is
not enough to save your money. You
might assume, it is a good idea to save the hard earned salary in a savings
account than risking it. But, inflation will keep cutting up your purchasing
power as inflation rate is often higher than what you’d earn from a savings
account.

2. Increasing wealth

Who doesn’t want to increase his
wealth? Everybody wants to increase the amount of wealth and assets over a
period of time. But, wealth doesn’t increase by itself. Or if you think you can
earn a lot of wealth by saving your salary, you are living in a fool’s
paradise.

Image Source: lusakatimes.com
Let’s just put the inflationary
effects aside. Say, you are saving a part of your salary every month without
the effect of inflation. How much would you be able to save annually? Could you
buy a car with all the savings after 5 years? Answer is most probably no,
because saving is not enough to become wealthy. Increasing wealth needs growth
in your money which is possible through investment.

3. Tax assessment

Every citizen of a nation has to
pay tax and that is the quality of a good citizen. But, sometimes tax would
seem burden to you if it really cuts up the profit. Especially when your money
is lying idle, tax can be heavy. So, invest your money and invest in selective sectors like
Public Provident Fund, National Saving Certificate etc. where you’ll have
significant amount of tax cut.

So, keeping all the hazards caused by savings, in mind, it is clear that investment is the wiser option.

More Articles for You

Difference between internal and external stakeholders |

In the trading world, the word stakeholder is a frequently used word. It is important to know what stakeholder does …

Some most effective investment options in India |

There is a wise saying, “No pain, no gain”. Almost all of us want to invest money in such a …

Essential lessons for stock market investment |

Cricket is a game of glorious uncertainty. Anything can happen at any moment in the game of cricket. Nothing is …

Essential tips for investing in a better IPO |

IPO or Initial Public Offerings is the biggest buzzword in present day stock markets. Form beginners to professionals, every investor …

Demat account and relevant steps of investing in stocks |

In today’s world, nobody wants their extra money to stay idle. It is not at all wise to keep liquid …

How to reduce risk in stock market investment |

One of the biggest myth and the same time a truth about stock market is that it is the riskiest …