Five basic investment concepts that you should know
You don't need to take an economics or finance course to learn how to invest, but it is important to understand these basic investment concepts.
Risk and return
Return and risk always go together. The higher the potential return, the higher the risk. You should never blindly pursue high-return investments. Bear in mind your investment goal, investment period and risk tolerance. Always choose an investment that is suitable for you.
Any investment involves risk. You cannot avoid it, but you can manage your risk exposure with the right strategy to reduce the chances of major losses. The simplest and best way is to diversify your investments and spread your risk. An effective way is to diversify your investment to different asset classes, such as stocks, bonds, deposits etc.
This is a long-term strategy. You regularly (e.g. monthly) invest a fixed amount, whatever the share price. In the long run this balances out the cost of buying shares and lessens the effect of short-term market fluctuation.
Your principal (original money paid in) grows because of the interest earned, so you get a higher return. It’s a snowball effect – the longer you invest, the more you benefit from compound interest. Therefore, it is important to start saving and investing early.
For the past few decades, there has usually been inflation in Hong Kong. Your investment needs a return rate that matches or beats inflation. If not, then your money will be worth less.
Find out more from our animation series to help you better understand the basics of investing.