A Beginners Guide to Investing

A Beginners Guide to Investing

A Beginners Guide to Investing from MOXI Wealth

Essentially there are three ways to earn money from investing:

  1. Lend money in return for interest
  2. Buy something and sell it for more at a later date
  3. Own something that pays you an income

Some investments are straightforward and some are a combination of the above. Let’s start with examples.

Peer-to-Peer Lending

You lend money in return for interest. The longer you commit to lending the more interest you’ll receive. This works via a platform who looks after all the lenders on one side and the borrowers on the other. The platform will receive interest from the borrows and pass on a portion of this interest to you. FYI, this is how retail banks make most of their money, by being the middle-person between lenders and borrowers.

Buying Bonds

Buying a bond is the same as lending money in return for interest. What a bond does is package this loan up into a tidy contract. The bond will tell you the interest you’ll receive (aka coupons), how often and when the loan will be paid back to you (aka end of term). If you buy ten bonds from a company each worth £100 it means you are lending them £1,000.

Side note: Bonds can also be purchased in the ‘secondary’ market. This means you are buying a bond from another investor rather directly from the company who released the bond. At this stage the bond may have changed price, that is it start at £100 but now is worth more or less. You can read more about that here.

Buying Shares

When you buy shares you own a small part of a company (or large depending on how many shares you own). As a company owner, you can make money in two ways… First, when the company makes a profit and pays this out to their shareholders aka pays dividends. Second, if the company goes up in value you could sell your shares for more than you bought them.

Side note: Making money from dividends is called earning ‘income’ and making money from a price increase is called a ‘capital gain’. These are taxed differently.

Buying Commodities

The idea is simple, you buy a product like gold, oil or coffee and sell it for more at a later date. The same principle applies to buying wines, stamps, and antiques… but with these, you would physically buy and keep whilst major commodities are traded on exchanges with high turnover and are never actually delivered to your home. All you care about is getting access to an exchange online and the price change. Commodities are regarded as a higher risk investment because prices are more volatile.

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