The Basics Of Investment

The Basics of Investment, this is what I’m gonna teach you in this post, like What Investment Really Is? and Why You Need To Start Investing?

Nominal Value Vs Real Value of Money

Before moving ahead, I would like you to know about the difference between Nominal Value of Money and the Real Value of money which is the main thing to know about basics of investment.

Let me make it more clear to you with a simple example to learn about basics of investment,

Ram earns the X amount of Money every month, and what he does is that he spends that money on his necessary expenses and he saves the rest money.

Now, if he saves that rest part of money he earned in his locker for one year, what will happen to that money?

Off course nothing, let’s say Ram saved Rs. 100 in his locker last year, now as 1 year has been passed..how much money will he have in his locker now? Off course Rs. 100 only.

So, you can see the nominal value of money doesn’t changes with the time. But, real value of money changes as the time passes.

The fact is that the real value of Ram’s Rs. 100 which he saved in his locker last year is not the same Rs. 100 today, the real value of that Rs. 100 will be around Rs. 88 (assuming inflation @ 12%)

In this example Ram lacks the basics of investment, which you are going to master at the end of this post.

Still Confused?

Let me again make it more clearer with the simple formula,

i.e. Real Value or Real Rate of Return = Nominal Value – Inflation

Let’s put the values of above example in the formula given above.

Real Value or ROR = 100 – 12% of 100 for 1 year;
=> 100 – 12;
=> 88

Therefore, Real Value or Real Rate of Return of Rs. 100 saved in locker by Ram last year, is now just Rs. 88.

as you have basically understood the difference between the nominal value of money and the real value of money, it’s time to take you to…

What Investment Really Is?

I personally would like to derive Investment in this way…

Investment helps you to narrow down the gap between the Nominal Value of money and the Inflation to get the Favorable Real Value of Money over the period of time.

Now, as you can understand from the definition of Investment which I have derived for you to make it simply understandable and more clearer, that the investments can help you and your money grow by the time.

Some investments help you and your money grow little, while some help to grow a lot..it depends on the basis of risk. The more risk you take, the more return you will get.

Different Instruments Available for Investing

There are many instruments available to invest money in, such as Stocks, Bonds, Debentures, Real Estates, Jewelry, Fixed Deposits, Post Office Schemes, NSC etc.

Every investing instrument have different rate of returns for a period of time, as I said above the more riskier investment you choose the more chances you have to beat inflation and get favorable real value of money. Which is also the main part to know about basics of investment.

Why You Need To Start Investing?

Well, if you don’t want to deplete your money like Ram by saving your money in lockers for years, then start investing in different investing instruments to beat the inflation and grow your money year by year which can also help you build great wealth.

If you would like to learn the simple way of investing in stocks, then you must read my post on SIP Investment, which will guide you through investing in stock market in India (even if you’re just a beginner here).

Bottom Line

I would like to finalize whatever I have tried to teach you in this post about basics of investment.

Make sure to ask yourself that you are clear about the concepts we discussed above, have you understood the basic difference between the nominal value of money and the real value of money? If, No then please read it again and again until you understand it properly.

After that, have you understood what Investment really is? and why you should also invest? If, No then please again re-read that section, if you still don’t understand anything or have any queries related to basics of investment then feel free to write me at [email protected]

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