Introduction to Investing

As the internet has seemingly become saturated with the seductive allure of get rich quick schemes, it is perhaps important that members of our generation are informed about some of the fundamental concepts of investing before committing their hard earned wages to empty promises.

Investing is the act of allocating resources, in hopes of generating returns in the form of profit.

For many our age, the usage often refers exclusively to investment in financial instruments.

What is investing?

A financial asset is essentially an agreement between you and an external party, where you give them some cash, and in return, they give you either ownership in their company, or a promise that they will repay you with more money in the future. 

 

The first case (ownership) refers to equity-based financial instruments (stocks and shares), which are perhaps the most widely recognised form of financial instrument. 

 

Basically, you give a company some money (i.e. buy stock in a company), and in exchange, you own a small percentage of their company. (Which, in cases of huge companies, is a really small percentage). 

 

Why bother owning 0.00005% of a company? 

 

  1. This could allow you to receive a teeny-tiny chunk of their profits if the company pays dividends to its shareholders 

  2. Should the company’s stock/ share price increases, you can sell your stocks/ shares to another person

 

The second case (that you will be repaid with more money in the future) refers to bonds. This is when you give cash to a company, or a government, and they promise to repay you with additional interest.

Investing vs Trading

An investor analyzes the fundamentals of a company to determine the fair value of the business. 

 

This comes in contrast to trading, which is attempting to make money through frequent transactions based on short term fluctuations in asset prices. This takes advantage of market volatility rather than underlying trends. Trading is very convenient and can be done through platforms like Robinhood, and the instantaneous gratification of executing a trade, and the thrill of seeing quick profit is extremely appealing.

 

However, as exhilarating as trading may be, it may not prove to be the best strategy for Gen Z members to earn an alternate source of income for several reasons:

 

1. As trades rely on small fluctuations in the market, most trading positions only yield small profit margins – often a fraction of a percentage point per position.

 

2. Hence, in order for trading to be a viable profit generating strategy, investors often have to put large sums of money behind positions so that they can profit off of these margins, even investing money they don’t have in the hopes of seeing greater returns. This exposes investors to the risks associated with market volatility. While this may prove less problematic for large funds that can absorb short term losses, the same may not be true for Gen Z investors just starting out in their careers.

 

3. The short time frames with which investors have to make decisions when trading often forces them to execute trades based on incomplete information. Professional institutions often employ armies of quant researchers and droves of supercomputers to analyse market data to inform their trades. Gen Z investors simply do not have that intel. 

4.Gen Z investors cannot hope to monitor the markets at all times. While trading professionals can afford to be glued to their Bloomberg Terminals for every second of trading hours, most of us don’t do this as a full time job, and have other commitments in life. When timing is of the essence in trading, time is often what us Gen Z members don’t have in abundance.

 

While everyone has their own tolerance and appetite for risk, it is for these reasons that we advocate investing as opposed to trading as a means of generating income for Gen Z members. This is where Environmental, Sustainability and Governance investing, or ESG comes in.

 

BlackRock, the world’s biggest asset manager, has recently put climate change at the centre of its investment strategy.

What are financial instruments?