Before putting money into the market, it is important to understand what investing actually is and what you are trying to achieve.
You do not need to know every investing term or know how to analyse companies yet. The goal of this phase is simply to build a strong foundation before moving on to more advanced topics.
By the end of this phase, you should understand:
- What investing means
- Why people invest
- Saving vs investing
- Investing vs trading
- Risk and return
- Time horizon
- Financial goals
- Inflation and purchasing power
- A few basic investing terms
The goal is not to become an expert overnight. It is to understand enough to start making informed decisions for yourself.
Disclaimer: This guide is for educational purposes only and does not constitute financial advice. Investments can rise or fall in value, and you should always do your own research before investing.
What Is Investing?
Investing means putting money into an asset with the expectation that it may grow in value or generate income over time.
For example, if you buy shares in a company, you are buying a small ownership stake in that business.
If the company grows, earns more money and becomes more valuable over time, the value of your investment may also increase.
Some investments may also generate income along the way through things such as:
- Dividends
- Interest
- Distributions
The key phrase is:
Over time.
Investing is generally about building wealth over years or even decades, rather than trying to make quick money tomorrow.
Why Do People Invest?
People invest for many different reasons.
Common goals include:
- Building long-term wealth
- Retirement
- Financial independence
- Buying a home
- Funding future expenses
- Growing money faster than leaving everything as cash
The important thing is that your reason for investing should come before choosing what to invest in.
Someone investing for retirement 30 years from now may make very different decisions from someone who needs the money in two years.
Inflation: Why Doing Nothing Has a Cost
Keeping money as cash can feel completely safe because the number in your bank account does not fall.
However, inflation can reduce what that money can actually buy.
For example, if something costs $10 today, it may cost more in the future even though the product itself has not changed.
This means the purchasing power of your money can decline over time.
That does not mean all your cash should be invested.
Cash is still important for:
- Daily expenses
- Emergencies
- Upcoming purchases
- Short-term goals
The point is simply that money kept entirely in cash for decades may struggle to keep up with rising prices.
Saving vs Investing
Saving and investing serve different purposes.
| Saving | Investing |
|---|---|
| Usually lower risk | Usually involves more risk |
| Useful for short-term needs | Better suited to longer-term goals |
| Easier access to cash | Value can rise and fall |
| Usually lower expected return | Higher potential long-term return |
A simple way to think about it:
Save for money you may need soon. Invest money intended for longer-term goals.
There is no universal rule for exactly how much should be saved or invested.
Your own financial situation matters.
Investing vs Trading
Investing and trading both involve financial markets, but the approach is usually different.
Investing
Investors generally focus on:
- Long-term growth
- Business fundamentals
- Earnings and cash flow
- Valuation
- Holding for years
- Building wealth gradually
Example:
You buy an investment because you believe the underlying business or market will grow over the next 10 years.
Trading
Traders generally focus more on:
- Short-term price movements
- Market momentum
- Technical analysis
- News and catalysts
- More frequent buying and selling
Example:
You buy an asset because you expect the price to rise over the next few days or weeks.
Neither approach guarantees profits.
What matters is knowing which approach you are actually taking.
Buying something without understanding why you own it is not an investment strategy.
Risk and Return
Every investment involves some form of risk.
Generally:
The possibility of higher returns usually comes with greater uncertainty and a greater chance of loss.
A low-risk savings product may provide relatively stable returns.
A fast-growing company may offer much greater upside, but its share price may also fall significantly.
Risk does not simply mean:
“Will I lose all my money?”
It can also include:
- How much the investment price moves
- How uncertain future returns are
- How long it may take to recover from a decline
- Whether you may need to sell at a bad time
You will learn about specific types of investment risk and how to manage them later in Phase 8.
Your Time Horizon
Your time horizon is the amount of time before you expect to need the money you are investing.
| Goal | Example Time Horizon |
|---|---|
| Holiday next year | Short-term |
| Home purchase in 5 years | Medium-term |
| Retirement in 30 years | Long-term |
Investments can fall sharply in the short term.
If you need the money soon, you may not have enough time to wait for the market to recover.
Someone with a long time horizon can generally tolerate more short-term volatility than someone who needs their money next year.
Know Your Goal Before You Invest
Before deciding what to buy, ask yourself:
- What am I investing for?
- When will I need this money?
- How much can I invest regularly?
- How much loss or volatility can I realistically tolerate?
- Would I panic if my portfolio fell significantly?
There is no perfect answer.
The point is to make sure your investment decisions match your own situation, rather than copying someone else’s portfolio.
Basic Terms You Should Know
Capital Gain
A capital gain happens when an investment increases in value.
Example:
You buy an investment for $100 and later sell it for $120.
Your capital gain is $20 before fees and taxes.
Capital Loss
A capital loss happens when an investment is sold for less than what you paid.
Example:
You buy at $100 and sell at $80.
Your capital loss is $20.
Return
Your return is the gain or loss generated by an investment over a period of time.
Returns can come from:
- Price appreciation
- Dividends
- Interest
- Distributions
Dividend
A dividend is a payment that some companies make to shareholders from their profits or reserves.
Not every company pays dividends.
Volatility
Volatility describes how much an investment’s price moves up and down.
An investment with large price swings is generally considered more volatile.
High volatility does not automatically mean an investment is bad, but it can make the journey much harder emotionally.
How Do You Actually Start Investing?
You do not need to rush into buying something immediately.
A sensible beginner process is:
1. Understand why you want to invest
Set a clear goal and time horizon.
2. Learn the basic investment choices
Before buying anything, understand what stocks, ETFs, bonds and REITs actually are.
These will be covered properly in Phase 2.
3. Make sure your finances can support investing
Money needed for emergencies or short-term expenses should generally not depend on the stock market performing well.
Budgeting and emergency funds will also be covered in Phase 2.
4. Learn before increasing complexity
You do not need:
- Dozens of stocks
- Options strategies
- Multiple brokerage accounts
- A prediction of the next market crash
Start simple.
More advanced tools only become useful after you understand the fundamentals.
Common Beginner Mistakes
Investing because everyone else is doing it
Popularity does not tell you whether an investment is suitable or fairly valued.
Expecting quick money
Investing is not a guaranteed shortcut to wealth.
Long-term wealth usually comes from a combination of:
- Time
- Consistency
- Income
- Saving
- Investing
- Discipline
Copying another person’s portfolio
Two investors may have completely different:
- Goals
- Incomes
- Time horizons
- Risk tolerance
- Financial obligations
Learn from other investors, but understand why something belongs in your own portfolio.
Investing money you may need soon
Markets can decline at the exact time you need the money.
Your time horizon matters.
Thinking price and value are the same thing
An investment becoming more expensive does not automatically mean it has become more valuable.
You will learn how to analyse businesses and valuation later in Phases 4 and 5.
What You Should Understand After This Phase
Before moving on, you should be able to explain:
- What investing means
- Why people invest
- Why inflation matters
- The difference between saving and investing
- The difference between investing and trading
- The relationship between risk and return
- Why time horizon matters
- Why financial goals should come before choosing investments
- What basic terms such as capital gain, dividend, return and volatility mean
You do not need to memorise everything.
If you understand these ideas, you have the foundation needed to start learning what you can actually invest in.
Helpful Resources
- Investopedia — How to Start Investing
- YouTube — What Are Stocks?
- YouTube — Investing vs Trading
- Demi Zhuang — YouTube Channel
- Investor.gov — Introduction to Investing
Key Takeaways
- Investing means putting money into assets with the aim of growing wealth or generating income over time.
- Your financial goal should come before choosing an investment.
- Saving and investing serve different purposes.
- Investing and trading are different approaches.
- Higher potential returns generally involve greater risk.
- Your time horizon affects how much short-term volatility you can reasonably tolerate.
- Inflation can reduce the purchasing power of cash over long periods.
- Understand why you are investing before deciding what to buy.
Knowledge is one of the best investments you can make.