Day 5 : The basics of investing – Part 1

Financial planning and saving are important. So far, so good! But now comes the next step – one that is important, and unfortunately, often left out: investment. For many, it seems confusing and unpredictable. That’s why you should gain a basic understanding of investing. And above all, don’t be afraid of it. The more information you have, the more you’ll get the concept. And be more fascinated by it! The financial markets can have alarming downturns, but history has shown that they always bounce back in the long run. A good example of this is the coronavirus crisis. In March/April 2020, stocks dropped by around 30%, but after a little over a year, they recovered and rose to new heights.

Stock indexes

How the markets are trending is reflected in indexes, like the Dow Jones Index. The Dow Jones Index is a stock index. It shows the market trends of the 30 largest stock corporations in the US. It was founded at the end of the 19th century to measure the development of the American stock markets. Another index is the DAX, the German stock index, which is determined by the values of the largest German corporations.

The average annual return is about 8%, which is pretty cool when you extrapolate that out. That’s because your money is working for you. You don’t have to do anything other than ensuring you invest something every month. And then the money grows steadily – over one year, five years, ten years…and after 20 years, there’s really something to show for it.

Maybe you’ve just started crunching the numbers. There’s a certain something at play that leads to rapid growth of your money:

Interest and compound interest

The effect of compound interest is what gives investing its power. The effect works in your favor and understanding it can be a life-changing discovery. When you save money regularly, it grows because of the interest. But with compound interest, it grows even faster. How? Thanks to the interest, your original amount of money grows by a certain percentage: the yield. You get more interest from this, and it all continues to grow together. So you earn interest not only on the original amount but also on the interest that you got for it. Bottom line, this means your money grows exponentially. In other words, money grows faster and faster with time! And that’s exactly what happens when you invest. Compound interest is the reason you can achieve so much by investing.

 

Average cost-effect

When you’re new to investing, you’ll get the most profit out of compound interest if you invest a specific, fixed amount of money each month over a long period of time. And it doesn’t matter whether stock prices rise or fall. This way, you have at the end of the year an average price and probably a good return.