By Vitalii Dodonov on The Capital
Investing is and has always been a way to earn one’s personal and financial freedom. Yet, many of us avoid the subject altogether, assuming it is too risky, too time-consuming, or concluding that money is not important. In this article, we will look into how investing may enable your potential and other non-material aspirations.
Why we don’t invest
Many of us think or say: “Money is not important to me.” Indeed, in a well-established society where our levels of income exceed our basic needs, making money diminishes its priority. We tend to focus more on experience rather than material goals. Why saving up for a house when the money may be spent on travelling, never having to settle? Why doing long hours at work and advancing our career, when it takes away from our personal space, family, and friends? Why restrict ourselves in spending, saving up for the future, when the best time of our lives is now. These questions are just the surface of reasons for why we don’t invest. It’s important to acknowledge them before we move on.
Let’s ask ourselves provocative questions. Why can’t we go to another long-waiting vacation sooner than next year? Why do we drive a car that’s okay and not splendid? Why do we constantly search for discounts in retail stores rather than just buying what we need? Why do we see people that matter to us so rarely? Why do we look at prices in a restaurant when our date may be the one that puts the beginning of a long and exciting journey? Because we are constrained. We are constrained by the amount of time and resources we have in our possession. We are too busy exchanging our time for money, which is sufficient to keep us going, but not for much else.
What investing is not
Investing is not something that will take away our time or money. It is a way for us to earn more time and more money with the least amount of effort. Instead of spending 40 hours per week earning ourselves a weekend to squeeze in the things we love, we can spend only 30, then 20, then 10, eventually negligible number of hours. While some may argue that working is what they love to do, a question I propose is whether this work has to be profitable. Why keeping ourselves in the necessity of working when we can have the power to choose whether we want to work or not. Most of us cannot afford not to work profitably. This is where we find the enabling power of investing. Investing is what enables us to work for free on things we love while taking care of our material wellbeing.
What investing is
Investing, in layman’s terms, is a way to have our money generate more money, while we spend your time doing something else. For most people, the way to make money is to go to work and earn it. Everyone can do it, this is where we get started. The question is whether we, ourselves, need to be the engine of the money-making machine. The ability to modernize the process of making money to the point where we don’t have to spend our time doing it is what separates an investor from a worker. The general approach to such modernization is to purchase assets that generate more assets. The easiest way to do so is to buy a company. While buying a company might sound expensive to an unaware individual, buying Apple, for example, would cost us about $280 a piece, Microsoft $154 a piece, Coca Cola $53 a piece as of December 2019. At the price of an expensive dinner, we can become owners of a large corporation. Wow! What’s the catch?
The catch is that we don’t own the entire company but a piece of it. This piece of a company is called a share. A company’s share grants us ownership in that company in proportion to the total number of shares in the market. To put it simpler, if you own 1 share and there is a total of 10 shares in the market, you own 10% of this company. Such ownership does not entitle us to go to the Microsoft office, pick up a chair and walk away claiming it ours. It entitles us, however, to share part of Microsoft’s profits. With 10% of a company in our possession, we rightfully own 10% of its profits. Since investors are not managers, like CEO and other employees, they don’t get to decide whether they can take that money or invest it back into the business. On the other side, investors have the power to hire and fire managers (including CEOs) if those do or do not perform well. Management is responsible for decisions in regard to handling profits. Often, part of profits will be paid back to owners (ourselves) in a form of dividends and the other part will be invested back into the business. Money invested back into the business would normally increase the value of the business. Since the value of the business has increased, so did the value of the shares we own.
How do we make money
While share prices of public companies are subject to trends, market oscillations, recessions, and other factors, investors (ourselves) are free to sell their shares at any point in time. An investment is considered to be successful when its worth increases compared to the moment of purchase in a reasonable amount of time. In addition to the opportunity of increasing one’s net worth through the growth of value of their investments, stockholders often enjoy dividends on a scale of 0–10% annually on the stock price.
While the subject of how to select the right stocks and what risks are involved are presented well in literature and other publications, this article aims to demonstrate that investing is a worthwhile subject to study for an ordinary individual if his or her objective is to achieve financial independence. Stay tuned to learn more about how a retail investor (ordinary individual) may approach investing and enable their future financial freedom.