Investing 101:
The Best Way to Save Money
You may have heard advice from your parents, friends, coworkers, or acquaintances: "It's best to start saving some money now—college is expensive, retirement will come faster than you expect, and you need to start learning how to invest."
Saving alone is no longer enough to guarantee a stable financial future. Economic inflation causes gradual but continuous price increases, which reduces the value of saved money and raises the cost of living. This makes it essential to take steps that preserve—and even grow—the value of your savings.
Of course, real estate investment is an option if you have sufficient capital. However, entering the world of securities and their derivatives (such as stocks) doesn’t require large amounts of money—you can start with as little as 50 dinars.
Certainly, the stock market may seem complex, and bonds can appear even more confusing than stocks. But you don't need to be a professional to succeed in investing, nor do you need a university degree. What you do need is a certain level of knowledge (a willingness to study basic principles and guidelines), along with patience and discipline.
In fact, investing has never been easier thanks to numerous online platforms and brokerage firms that offer tools and resources for learning the fundamentals of investing. Fortunately, one of the most valuable tools in the world of investing is available for free to everyone: time—the weeks, months, and years needed to turn modest financial assets into real wealth. The younger you are, the more time you have to multiply your wealth.
The Principle of Compounding
Compounding, or the power of compounding, refers to how money grows over time through reinvestment of returns. For example, profits earned from a stock investment, along with dividends distributed by companies to shareholders, are added back to your original capital. This leads to higher returns in the next investment cycle because earnings are now being generated on both the initial amount and the accumulated gains.
Let’s assume, for example, that you invested $1,000 in a stock mutual fund (a group of combined stocks) or any other investment yielding an average return of 7%. After one year, the fund should grow to $1,070—your original $1,000 plus $70 in capital gains or distributions. By the end of the second year, the account would grow to $1,144.90—in other words, $1,070 from the first year plus $74.90 in returns from the second year (7% of $1,070).
Additionally, suppose an investor continued to invest an additional $1,000 annually for the next 20 years. Assuming the same annual return of 7%, the total accumulated assets in the stock fund would grow to$40,995.49! That means from just$20,000in contributions ($1,000 per year for 20 years), your money would more than double.
Available Investment Options
Once a beginner understands the power of time and the importance of compounding and reinvesting returns, the next step is to explore different investment options. The securities market is vast, with the stock market playing a central role. Stocks represent shares or portions of a company that can be bought and sold on public markets at prices that fluctuate based on the company's performance.
Imagine a company called ABC that is divided into 100 million shares owned by investors around the world—these individuals are the shareholders of publicly traded ABC Company.
Naturally, investors constantly seek stocks that provide excellent returns, helping them reach their financial goals more quickly. For instance, if someone invested $20,000 in a stock fund earning an average annual return of 9%, the investment would grow to$51,160.12. If the annual return were only 6%, it would grow to$36,785.59.
Some stocks are more volatile (or risky) than others, meaning they can generate high returns or lead to losses in your original capital. On the other hand, investments considered “safe” usually offer steady annual returns, making them popular among investors, especially those who prefer to avoid risk and invest over the long term.
So, how can an investor distinguish between them?
This distinction is made primarily through research, diving into company news and reports, then analyzing this data to understand the factors influencing market ups and downs. With time, this builds experience that helps you make successful investment decisions.
Markets naturally go up and down, but generally, the long-term trend of market prices is upward. Therefore, a successful investor learns self-control and avoids rushing into buying when markets rise or selling when they fall. Emotional decisions often lead to disappointment.
When building a strong financial portfolio, monitoring investment costs is essential. Hiring a money manager or financial advisor might be a wise move, but at the same time, the fees paid for management and advisory services could reduce your overall investment returns.
Today, more than ever before, you have access to the tools necessary to control your financial future. The process is not only profitable—it's also easy and enjoyable!
