What is Investing?
Investing is the strategic allocation of capital to assets such as shares, real estate, or funds with the expectation they'll increase in value over time. Unlike saving, investing involves risk but offers potential for greater returns that can outpace inflation. When you invest in company shares, you may receive additional income through dividends, while property investments typically generate rental income.
The fundamental principle of investing centers on the concept of "making your money work for you." Rather than letting capital sit idle, investing puts your funds to work in vehicles designed to grow wealth over time. Historical data shows that the S&P 500 has delivered an average annual return of approximately 10% over the past three decades, significantly outperforming typical savings accounts.
Understanding Investment Risk
All investing carries risk, and beginners face even greater uncertainty. The primary risk is losing part or all of your initial capital, making effective risk management essential for any investor.
Risk manifests in various forms, from market volatility to company-specific challenges. During the 2008 financial crisis, many investors witnessed portfolio values decline by up to 50%. However, those who maintained their investments through the downturn ultimately benefited from the subsequent recovery, highlighting the importance of a long-term perspective.
As Warren Buffett famously stated, "Risk comes from not knowing what you're doing." This underscores the value of education before committing capital to any investment vehicle. Understanding the compound growth formula (A = P × (1 + r/n)^nt) helps illustrate how investments grow over time through the power of compounding.
How Does Investing Differ from Saving?
Key Differences Between Investing and Saving
- Risk level: Savings have minimal risk of loss but offer lower returns; investments have higher potential returns with greater risk
- Inflation impact: Savings accounts often fail to keep pace with inflation, reducing purchasing power over time
- Growth potential: Investments can significantly outperform savings accounts over the long term
The average savings account in 2025 offers an annual percentage yield (APY) of just 0.5%, while the stock market has historically delivered around 7% in real returns after accounting for inflation. This stark difference becomes increasingly significant over longer time periods.
The Real Impact of Inflation
A non-interest earning deposit of $1,000 would be worth only $820 in today's money after 10 years with 2% inflation—an 18% loss in purchasing power.
The economist Paul Samuelson aptly noted, "Investing should be more like watching paint dry. If you want excitement, take $800 and go to Las Vegas." This emphasizes that successful investing vs. speculating requires patience and discipline rather than frequent trading or market timing.
To calculate your real return on any investment, simply subtract the inflation rate from your nominal return. For example, if your investment grows by 8% and inflation is 3%, your real return is 5%.
Hypothetical Comparison
- Savings scenario: $5,000 initial deposit with $200 monthly contributions over 10 years at 2% interest (with 4% inflation) would be worth $25,826 in today's money
- Investment scenario: Same initial deposit and monthly contributions with 9% average return (5% real return after inflation) would be worth $39,420 in today's money
This $13,594 difference illustrates why many financial advisors recommend investing for long-term goals like retirement, while saving remains appropriate for emergency funds and short-term objectives.
What Types of Investment Products Are Available?
Shares
When you buy shares, you own a portion of a publicly listed company. Share prices fluctuate based on market forces, making them relatively volatile. Many investors choose shares of established companies with strong performance histories, which may provide both capital appreciation and dividend income.
Companies like Apple, with its market capitalization exceeding $2.6 trillion, represent how individual stocks can grow substantially over time. When evaluating shares, investors typically consider metrics such as price-to-earnings ratios, dividend yields, and growth prospects.
Investing directly in individual shares requires more research and carries greater company-specific risk than diversified options like funds. However, it also offers potentially higher returns and more control over your investment selections.
Funds
Funds pool money from multiple investors to purchase a diversified selection of securities. As the value of these assets increases, the fund's value grows proportionally. Funds can be:
- Actively managed: Aim to outperform the market (higher costs, typically 0.62% expense ratio on average)
- Passively managed: Track market indexes like the ASX 200 (lower costs, often as low as 0.03% for major index funds)
John Bogle, founder of Vanguard, famously advised, "Don't look for the needle in the haystack. Just buy the haystack." This philosophy underpins the popularity of index funds, which provide exposure to entire markets rather than attempting to select individual winners.
ETFs (Exchange-Traded Funds)
ETFs track the performance of a basket of underlying assets—such as stocks, currencies, or sectors—allowing you to gain broader market exposure through a single position. An ETF's price is determined by its net asset value (NAV), calculated as: (ETF asset value – ETF liability value) ÷ number of shares in circulation.
The global ETF market has grown exponentially, with assets under management exceeding $11.7 trillion in 2025. Popular options like the SPDR S&P 500 ETF (SPY) manage over $400 billion in assets, providing investors with instant diversification across America's largest companies.
ETFs combine the diversification benefits of mutual funds with the trading flexibility of individual stocks, making them particularly suitable for beginners seeking broad market exposure without extensive research requirements.
Why is Diversification Important for Managing Risk?
Investment risk—the chance of receiving less capital than initially invested—can occur due to:
- Economic downturns affecting market performance
- Poor company performance within specific industries
- Loss of investor confidence
- Competitive pressures from alternative investments
- Exchange rate fluctuations affecting offshore investments
- Geopolitical events like trade wars
Historical data from the 2008 financial crisis shows that diversified portfolios recovered approximately three years faster than concentrated ones. While an all-stock portfolio lost around 50% during the crisis, a balanced 60/40 stocks/bonds allocation experienced a more modest 20% decline.
How to Diversify Effectively
Diversification involves spreading your capital across different:
- Market segments
- Asset types
- Geographic regions
This strategy helps mitigate risk, as losses in one area may be offset by gains in others. ETFs are particularly popular among new investors because they offer built-in diversification.
The mathematical foundation for diversification comes from Modern Portfolio Theory, developed by Nobel laureate Harry Markowitz. The portfolio variance formula (σp² = ∑wiwiσiσjρij) demonstrates how combining assets with low correlations reduces overall portfolio volatility without necessarily sacrificing returns.
Gold, for instance, historically maintains a negative correlation of approximately -0.2 with stocks, potentially providing stability during market volatility. However, over-diversification can also dilute returns, highlighting the importance of strategic rather than indiscriminate asset allocation.
What Role Does a Broker Play in Investing?
Stock exchanges are highly regulated environments where only accredited entities can execute trades. As an investor, you must place orders through a broker who will execute deals on your behalf. Brokers charge fees for their services and may offer:
- Execution-only services
- Advisory services (less common)
The brokerage landscape has evolved dramatically, with commission-free trading becoming the industry standard by 2025. Major brokers collectively manage over $7 trillion in assets, facilitating millions of transactions daily through sophisticated electronic trading systems.
When selecting a broker, consider factors beyond cost, including platform usability, research tools, customer service quality, and security measures. While traditional brokers offer comprehensive services, robo-advisors like Betterment have gained popularity by providing algorithm-driven portfolio management at reduced costs.
Regulatory bodies like the Financial Industry Regulatory Authority (FINRA) oversee brokers to ensure fair practices and investor protection. Before opening an account, verify your broker's credentials through FINRA's BrokerCheck tool to avoid potential fraud.
What Should You Consider Before Investing?
Investment Aims
Define your personal investment objectives, which might include:
- Capital preservation: Achieving returns higher than inflation
- Secondary income: Receiving regular payments like dividends
- Long-term growth: Significant appreciation of your initial investment
- Diversification: Reducing risk by investing in multiple asset types
Your investment goals should be SMART (Specific, Measurable, Achievable, Relevant, Time-bound). For example, rather than simply "saving for retirement," specify "accumulating $1 million in retirement accounts by age 65."
Risk Tolerance
Investors typically fall into five risk categories:
- Conservative (risk-averse, expect lower growth)
- Moderate
- Balanced
- Growth-focused
- Aggressive (can tolerate significant value fluctuations)
Professional risk assessment questionnaires typically classify conservative investors as preferring portfolios with approximately 10% stocks, while aggressive investors might maintain allocations of 90% or more in equities.
The Sharpe Ratio (Sharpe Ratio = (Rp – Rf)/σp) provides a mathematical measure of risk-adjusted returns, enabling comparison between different investment strategies based on the additional return generated per unit of risk.
Investment Horizon
Your investment horizon is the timeframe you plan to hold investments. Generally, longer investment periods help smooth out market volatility and maximize compound returns.
Time horizons typically align with specific goals:
- Short-term (0-3 years): Emergency funds, upcoming major purchases
- Medium-term (3-10 years): Home down payments, education funding
- Long-term (10+ years): Retirement planning, wealth accumulation
The power of compounding becomes increasingly significant with longer time horizons. A $10,000 investment growing at 8% annually becomes $21,589 after 10 years, $46,610 after 20 years, and $100,627 after 30 years.
Investment Style
Your overall approach combines factors like:
- Risk tolerance
- Investment horizon
- Whether you prefer active or passive management
Tax considerations also influence optimal investment strategies. Vehicles like Roth IRAs offer tax-free growth for retirement savings, while strategic tax-loss harvesting can enhance after-tax returns in taxable accounts.
How Do You Start Investing?
1. Understand How the Stock Market Works
Learn the fundamentals of stock exchanges—marketplaces where shares are bought and sold between companies and the public. Free resources like MoneySmart's investing guide offer educational courses for beginners.
Stock markets function through a network of exchanges where buyers and sellers interact, facilitated by market makers who ensure liquidity. Understanding concepts like bid-ask spreads, market orders, and limit orders provides essential groundwork for effective trading.
2. Define Your Objectives and Risk Tolerance
Establish clear investment goals and determine how much risk you're comfortable taking. Ensure your objectives align with your timeless investing rules and risk tolerance level.
Begin by assessing your current financial situation, including emergency savings, debt levels, and income stability. Investment planning should follow a hierarchy of needs, with foundational elements like emergency funds and debt reduction preceding market investments.
3. Choose Your Investment Approach
With how to start investing, you can:
- Invest directly in shares through a share trading platform
- Access thousands of international and Australian shares
- Invest in diversified ETFs for instant portfolio diversification
For most beginners, starting with low-cost, diversified ETFs provides an ideal entry point, offering immediate diversification without requiring extensive market knowledge. The dollar-cost averaging strategy—investing fixed amounts at regular intervals—helps reduce the impact of market volatility.
4. Select a Trustworthy Broker with Competitive Fees
Look for established brokers with competitive commission structures and transaction fees. Many platforms now offer commission-free trading for certain markets with minimal foreign exchange fees.
When evaluating brokers, consider more than headline commission rates. Additional factors include:
- Platform reliability and uptime
- Mobile app functionality
- Educational resources
- Customer service quality
- Account security features
5. Open an Investment Account
Complete an application form, verify your identity, fund your account, and begin investing once approved.
The account opening process typically requires:
- Personal identification documents
- Tax identification numbers
- Banking details for funding
- Investment experience information
Most platforms offer demo accounts allowing practice trading with virtual funds, providing valuable experience without financial risk. Consider starting with smaller investments until you've developed confidence in your strategy.
FAQs About Starting to Invest
How Do I Choose the Right Investment Platform?
Consider factors like:
- User interface and ease of use
- Available investment products
- Fee structure
- Research tools and educational resources
- Customer support quality
Platform selection should align with your investment style. Active traders may prioritize robust charting tools and low per-trade costs, while long-term investors might focus on research quality and automated features.
What's the Best Way to Start Investing in Shares?
Begin by:
- Researching companies in industries you understand
- Starting with a small amount you can afford to lose
- Considering ETFs for immediate diversification
- Developing a regular investment schedule
Warren Buffett's principle of investing within your "circle of competence" remains valuable for beginners. Starting with familiar industries leverages your existing knowledge and potentially reduces risk through better-informed decisions.
Why Should I Invest in Shares?
Shares offer:
- Potential for capital growth
- Income through dividends
- Ownership in businesses you believe in
- Liquidity (easy to buy and sell)
- Historical outperformance compared to many other asset classes
Over the long term, shares have consistently delivered superior returns compared to bonds, cash, and most alternative investments. Despite periods of volatility, the S&P 500's average annual return of approximately 10% since its inception demonstrates the wealth-building potential of equity investments.
The compounding effect of reinvested dividends significantly enhances long-term returns, with studies showing dividends contributing roughly 40% of total stock market returns over extended periods. This combination of growth potential and income generation makes shares a foundational component of most data-driven investment strategies. Additionally, following established insights on navigating financial markets can help beginners avoid common pitfalls when starting their investment journey.
For a comprehensive overview of investing basics, consider reviewing the Commonwealth Bank's guide for absolute beginners which provides practical examples tailored to the Australian market.
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