Introduction to investing

Investing is to sacrifice money in the present in the hope of more money in the future. In other words, an investment is a payment for the potential of a higher return. It’s essential to understand both the mechanics and the psychology of investing, to improve the odds of success.

To start with, investing is a risk. No one — however intelligent, educated, and experienced — knows the future. Therefore, when placing one’s money in any investment vehicle, that money is exposed to loss. That risk is the price for opportunity. If you don’t cross the road, you can’t get hit by a bus, but you will never get to the other side. Life is risk and opportunity, and we learn how to manage risk to maximize opportunity.

Amateur investors tend to focus on the upside, the potential gains, while they tend to disregard the downside, the possible loss. Like in everything else in life, there is a balance between risk and reward. By definition, the bigger the profit an investor seeks, the more the investment is exposed to risk. Conversely, the smaller the risk an investor is willing to take, the smaller the potential reward they can rationally expect. It’s mathematics and, therefore, unavoidable.

If an investor understands and internalizes these concepts, he will likely improve his results because trading is an attempt to get onto the side of statistics. If a trader expects only to win trades, he will quit after a few losing ones.That approach is irrational. We are attempting to dispel any such delusions so that you have a fighting chance to invest successfully.

About 20% of small businesses in both the US and in Europe fail in their first year. Roughly 50% of all small businesses in Europe will fall within the first three years. While there are multiple reasons for these businesses’ failure, one undoubted cause is persistence, or the lack thereof. If a business owner doesn’t show up the next day, the company fails. Therefore, it is paramount to know what to expect with investing. Given that statistics improve with the higher number of events, your odds of winning trade increase the longer you trade. So, if you will get discouraged after a few losing trades, save your money and don’t trade.

There are many kinds of investments, such as stocks, bonds, real estate properties and art. However, we’re going to focus on freely traded financial assets. Traditionally, there have been four main categories: stocks, currencies, commodities and bonds. In the last few years, however, a new asset class was born, and it has become exceedingly popular, especially with retail traders: cryptocurrencies.

A stock — also known as equity or share — represents a stake in a company proportionate to the total number of shares.

An investor may invest in a currency they believe will appreciate with value by purchasing it with another currency the investor expect will depreciate.

The purchase of a bond is, in effect, a loan made to the bond issuer. When an investor holds a government or corporate bond, the investor lends money to the issuer. A bond is debt security. Bonds are fixed-income securities because they are designed to provide a consistent payout on a schedule. However, bonds are also publicly traded like stocks. Therefore, their prices go up and down according to supply and demand. During that time, the bond’s payout continues according to its schedule. However, the value of that yield changes proportionate to the price the investor bought the bond.

Commodities are basic goods in commerce, ranging from energy like oil and gas to metals like gold and copper to soft commodities like coffee and sugar. Buyers of commodities are businesses that require the basic good to produce their products. Kellogg’s buys corn to make Corn Flakes, and Nescafe buys Coffee beans to manufacture its coffee.

The word “cryptocurrency” is a combination of two words: (1) crypto and (2) currency. “Crypto” refers to the complex cryptography that protects the digital “currency” created and processed in transactions in decentralized systems. The original cryptocurrency is said to be Bitcoin, founded in 2009. The primary objective of Bitcoin, and of all the other cryptocurrencies that followed, is to be a store of value, independent of government control and manipulation. However, the freedom of cryptocurrencies is now being challenged by governments worldwide, citing consumer protection. On the other hand, El Salvador became the first country to adopt Bitcoin as legal tender in September 2021, and the first Bitcoin ETF traded on the New York Stock Exchange was launched on October 19, 2021. So, while governments are scrutinizing Bitcoin, there have also been positive developments in that space.

It’s important to understand that this is an elementary explanation for complicated asset classes, which are also interrelated, making them also complex. When an investor purchases a stock, they do so with currency, which may impact the profitability of that investment. The company behind that stock issues bonds, which may affect the value of the corporation. The business may be related to a commodity, which may also impact the price of its stocks. Finally, cryptocurrencies have affected companies, like Tesla, which invested in Bitcoin and said it would accept it as a form of payment for its cars.

There are four primary forms of financial market analysis:

Fundamental analysis is the study of the business behind the stock. On the other hand, technical analysis evaluates the supply and demand of the stock, independent of its business. Macroeconomics analyzes the overall health of an economy, market or any system. Finally, quantitative analysis is a method that uses mathematical and statistical modelling, measuring and research to understand price changes.

The two most popular forms of analysis are fundamental and technical. Perhaps the most influential book on fundamental analysis is “The Intelligent Investor” by Benjamin Graham, Warren Buffet’s teacher and mentor.

A comprehensive book on technical analysis is “Technical Analysis — The Complete Resource for Financial Market Technicians” By Charles D. Kirkpatrick and Julie R. Dahlquist.

We at Swissquote intimately understand the importance of education to improve the chances for success of our traders. We, therefore, invest in the education and research we offer our traders. We provide analysis and up-to-date news in daily articles, videos and webinars.

Investing is not fortune-telling. No one can know the future. No one. Operating on the assumption that one knows the future is gambling.

After the investors do the research, they operate according to their understanding. If they decide to enter a trade, the trader knowingly risks capital for the potential of a reward. If you want to learn how to be an intelligent investor, you’ve come to the right place. Let’s start your journey together right now!

The content of this article (including market commentary, market data and observations) is not a work product of any research department of Swissquote or its affiliates. This material is intended to highlight market action and does not constitute investment, legal or tax advice.

Swissquote makes no representation or warranty as to the quality, completeness, accuracy, comprehensiveness or non-infringement of such content. The views expressed are those of the consultant and are provided for educational purposes only. Any information provided relating to a product or market should not be construed as recommending an investment strategy or transaction. Past performance is not a guarantee of future results.

Swissquote and its employees and representatives shall in no event be held liable for any damages or losses arising directly or indirectly from decisions made on the basis of the video content.

The use of any third-party brands or trademarks is for information only and does not imply endorsement by Swissquote, or that the trademark owner has authorised Swissquote to promote its products or services.

Swissquote is the marketing brand for the activities of Swissquote Bank Ltd (Switzerland) regulated by FINMA, Swissquote Bank Europe SA (Luxembourg) regulated by the CSSF, Swissquote Bank Ltd (UK) regulated by the FCA, Swissquote Financial Services (Malta) Ltd regulated by the Malta Financial Services Authority, Swissquote MEA Ltd. (UAE) regulated by the Dubai Financial Services Authority, Swissquote Pte Ltd (Singapore) regulated by the Monetary Authority of Singapore, Swissquote Asia Limited (Hong Kong) licensed by the Hong Kong Securities and Futures Commission (SFC).

Products and services of Swissquote are only intended for those permitted to receive them under local law.

All investments carry a degree of risk.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74–89 % of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Digital Assets are unregulated in most countries and consumer protection rules may not apply. As highly volatile speculative investments, Digital Assets are not suitable for investors without a high risk tolerance. Make sure you understand each Digital Asset before you trade.

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