When you work a job, you’re basically exchanging time for money: the more hours you work, the more money you make. It’s a good way to get by but a bad way to build wealth, because eventually you simply run out of hours.
That’s why if you want to grow wealth quickly, you need to make your money work for you. How? By investing and trading in the financial markets. Okay, so think of the financial markets as a garden where you grow well, just like you plant a seed and watch it grow.
In the financial markets, you can invest a small amount in companies, real estate, foreign currencies, and other securities, then share in their profits as they grow in value, and thanks to a financial principle called compound interest, your take becomes bigger and bigger every year. For instance, let’s say you invest $1,000 in Company A.
In the first year, they grow 15%, meaning you make 150 dollars, bringing your total to $1,150. Then the next year, they grow another 15%. But instead of making 15% on $1,000, you make 15% on your new total $1,150 which translates into $172.50 for the year, and $1,322.50 total.
Do this a couple more years and you will have doubled your money without lifting a finger, but if you never invested that $1,000 you wouldn’t have earned anything.
In fact, your money would have decreased in value due to the rising cost of living or inflation, even with an inflation rate of 5%, that $1000 would have lost a third of its value in ten years. So, clearly investing is the better way to go but how do you do it without taking on too much risk?
First off, you should put enough money into savings and insurance to protect yourself in the event of a downturn or adversity.
Second, if you’re just starting out, you can focus on regular investing or trading.
Regular investing allows you to accumulate wealth in the long run, while trading enables you to capture consistent short-term gains to grow your capital quickly, provided you understand behavioral analysis and market timing.
Finally, once you’ve established a large capital base, you can choose to buy and hold for the long term to generate capital gains and passive income, or use long term trading strategies to manage your portfolio effectively but those are just the basics.
There are many instruments for trading and investing, and in order to grow wealth on the market, you’ll need to understand how they work.
So next, let’s take a closer look at one of the most common types of investments: stocks.