How it works

Investments work on the principle of “money makes money”: the investor invests a certain amount and after a while takes profit in proportion to his contribution, or reinvests the money.

To start investing, you need to decide on your goals and budget.

The main goal of any investment is to generate income.

For example, buying real estate can be considered an investment only if you get more when selling it, taking into account inflation and the cost of repairs, utilities, furniture and household appliances.

But there are also more specific goals:

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  Forming a “safety cushion” - in case you lose your job or become seriously ill.

   

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  Large purchases: real estate, car, tuition fees or vacation.

   

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  Passive income is your additional income that does not require much effort or time. Over time, it can become the main one, and then you won't have to work anymore.

   

The choice of specific instruments with different returns, terms and risks depends on the purpose of the investment .

What types of investments are there?

Investments can be tangible or intangible. You can invest in real estate, business, securities, collectibles, antiques, as well as through bank deposits or purchasing currency . All these are investment objects.

By object of investment are divided into:

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  Real - something that is physically tangible, like real estate or jewelry.

   

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  Financial - everything related to financial transactions: bank deposits or trading on the stock exchange.

   

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  Venture investments are investments in startups that will cost much more in the future.

   

Depending on the period of investment, there are:

If you need a “financial cushion”, it is better to choose instruments that will allow you to access money at any time and not lose on commissions or market fluctuations. This can be a bank deposit. If you do not need money soon, you can consider long-term investments  - trading on the stock exchange, investing in a business, or purchasing real estate at the foundation pit stage.

Based on income received, investments are divided into:

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  Regular - those from which you receive income every month or year: for example, a bank deposit, stocks that pay dividends, or real estate that you rent out.

   

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  One-time - which generate income only once, upon sale.

   

By risk level:

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  Conservative - low risk.

   

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  Moderate - average risk.

   

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  Aggressive - investments with high risk.

   

The profit that investments bring directly depends on the degree of risk. For example, bank deposits will give you a guaranteed but low income that will barely cover inflation. On the contrary, a certain set of shares on the stock exchange can bring you, on average, about 30%, but with such a portfolio you risk losing everything and even more at any time.

How to invest on the stock exchange

To trade on the stock exchange, you need to assemble an investment portfolio - that is, buy assets that you will sell at the most advantageous point. Depending on what your goals are, your portfolio could be:

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  conservative - with an average return of 10–15% and a “drawdown” of up to 5% per year;

   

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  aggressive - up to 30% profitability and possible losses up to 15%;

   

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  moderate or balanced - that is, combining conservative and aggressive assets.

   

To insure yourself, you need to diversify assets - that is, distribute investments so as to reduce the overall level of risk. To do this, investors invest evenly in different sectors of the economy, types of business, countries and types of exchange instruments.

Main investment tools

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   Bonds are securities issued by large companies or government agencies in order to borrow money against them. Bonds have a fixed return and term - that is, you know exactly when and how much you will receive for them when you sell them. In addition, you receive regular interest payments - coupons. The yield is slightly higher than that of a bank deposit, but is stable and predictable.

    

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   Shares are securities that give you a certain share in the company, equivalent to part of the property and profits. If a company grows and shows positive financial statements, the shares also rise in price. Additionally, the company can pay dividends - a percentage of profits based on the results of a quarter, year or half-year. But if something is wrong in the company, you also lose profit or even go into the red. In the event of bankruptcy, common shareholders typically receive nothing. This is a riskier instrument than bonds, but its yield is also higher.

    

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   ETF (Exchange-Traded Fund) shares are portfolios of securities that are traded like ordinary shares. These are ready-made sets of tools that often cost less than the individual shares within them. ETF shares have a balanced risk: the high riskiness of some is offset by the stability of others.

    

A popular type of ETF is index funds. In them, the package of shares is formed on the basis of one or another index: for example, the S&P 500 or Dow Jones. Each fund has a different set of securities with distributed returns. In this case, the index is formed on the basis of financial analytics and objective indicators of companies. Therefore, the composition of the portfolio changes regularly: some companies can grow and enter it, while others can do the opposite. This provides additional insurance against high risks, and you do not have to monitor the financial statements of companies and other events in the market.

The optimal portfolio is considered to be one that includes from 5 to 10 different securities from 6–8 sectors of the economy. Beginners should take a closer look at instruments with stable, albeit small, income over many years: shares of leading companies like Apple, bonds and securities of countries with steadily growing economies, such as the USA or China. Experienced investors can afford a more aggressive portfolio, which consists of 50-70% shares of startups that promise explosive growth. But in this case, you will have to constantly monitor what is happening in the market and instantly respond to changes. For professional investors, this is a 24/7 job, unless they outsource management to a third-party broker or investment firm.

To trade on the stock exchange, you will also need a special account - an IIS or a brokerage account.

A brokerage account is suitable for those who want constant access to money and a wide selection of investment instruments. Income from investments on it can be exempt from personal income tax at 13%, and the amount in the account can be any.

IIS (individual investment account) , in addition to profits from trading on the stock exchange, gives you a guaranteed tax deduction.

Some tips for a beginner

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  Clearly define your goals and deadlines, and only then choose investment instruments. If you are not confident in your knowledge, contact an experienced broker .

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  Don't get carried away with risky tools, even if they are recommended by reputable experts. None of them can guarantee 100% growth, and  stock prices are affected by many factors, including global crises, pandemics or trade wars.

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  For your very first steps in the stock market, it is better to choose ETFs rather than individual stocks. This will cost you less and will allow you to immediately create a balanced portfolio.

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  Diversify risks. Try to keep no more than 20% risky instruments in your portfolio until you learn to navigate the stock market well.

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  Review the composition of a moderate portfolio approximately every six months to ensure its profitability does not decrease.

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  Don't panic. Growth and decline are part of the natural cycles of the global market. Investments on the stock exchange assume a long-term perspective. Therefore, do not rush to sell stocks during a fall, but wait until the market corrects.