Basic Investment Concepts: Your Essential Guide to Understanding Investing

Hello everyone and welcome back (or welcome for those arriving here for the first time)! We saw on the welcome page that Il Chiaro Finanziario is the right place if you are looking for simple answers about finance and how to make your money work better for you. But what are the basic investment concepts you need to know? And, most importantly, what exactly does “making your money work” mean? Indeed, these are fundamental questions, yet sometimes the answers seem reserved for insiders. No fear! In this first real article on “Il Chiaro Finanziario”, we lay the groundwork: we will understand in a super simple way what is meant by investment and take a first, clear look at the most common types you might encounter. The goal is to shed light on these basic investment concepts to take your first steps with more confidence.

So, put aside for a moment everything you’ve heard around or read in super technical newspapers. The concept of investment, at its core, is very intuitive.

To illustrate, imagine you have some money that you don’t currently need for everyday expenses. Instead of leaving it idle (perhaps in a current account where it doesn’t grow or grows very little), you decide to use it in a way that could make you earn more money in the future.

How Investments Generate Returns

Think of it a bit like a seed: you “invest” a seed (your money) in the ground (the investment opportunity) with the hope that with time, the right care, and a bit of luck, that seed will grow and give you a plant with many fruits (a gain greater than the initial money).

Understanding how investments generate returns is one of the core basic investment concepts.

In practice, investing means using your money with the goal of obtaining a future economic return, that is, getting back your initial money plus an extra.

Specifically, this “extra” can come in different ways: maybe as periodic interest, as dividends (a share of a company’s profits), or because you sell what you bought (stocks, real estate, etc.) at a higher price than you paid for it.

It’s important to understand that investment always involves a certain level of risk: there is never absolute certainty of earning, and in some cases, you can even lose a part or all of the money invested. But, usually, a higher potential return corresponds to a higher risk.

Why Not Leave Money Idle (In a Nutshell)

Okay, we said that investing means making your money work to get a future return. But why bother doing it? Why not just leave the money aside in a piggy bank or a current account?

There are mainly a couple of simple reasons why people choose to invest .These reasons form the foundation of basic investment concepts that everyone should grasp: 

• Grow Savings:

  The most obvious reason! The idea is that the invested money, with time and the right opportunity, can increase in value, giving you more money than you put in at the beginning. It’s a way to try to multiply your savings.

• Beat Inflation:

  This point is a bit less intuitive but very important. Think that every year the prices of things you buy tend to increase (this is inflation). If your money is idle and doesn’t grow, over time, even having the same amount of money, you will be able to buy less than before. Investing, if done well, can help you grow your money at a rate equal to or higher than inflation, so your purchasing power doesn’t decrease over time.

• Reach Future Goals:

  Many people invest to reach important milestones in life: buy a house, pay for their children’s university, secure a more comfortable retirement, or simply have more financial freedom in the future. Investing can accelerate the achievement of these goals.

In summary, people invest to try to increase their capital over time and ensure that their money maintains (or increases) its real value despite rising prices.

The Main Types of Investment (A Simple Map)

Okay, now that we know that investing means making our money work, let’s explore the main types of investment – these are crucial basic investment concepts that will guide you. There are many different paths, but here are some of the principal ones to start getting oriented:

• Stocks (Becoming Company Partners

• Imagine a company that wants to expand, perhaps open new stores or launch a new product. To do this, it needs money. Instead of asking for a huge bank loan, it decides to “put up for sale” a small part of its ownership, dividing it into many very small shares called stocks.
  When you buy a stock, you effectively become a small owner, a “partner” of that company.
  You can earn in two main ways: if the company does well, the value of its stocks can rise, and you can sell them at a higher price (this is capital gain); or, if the company makes profits, it can decide to distribute a part to the partners in the form of dividends.
  The risk? If the company does poorly, the value of the stocks can fall, and you could lose the money invested.

• Bonds (Lending Money to Someone):

• Here the logic is different: you don’t become a partner, but you become a creditor. In practice, you lend your money to someone who needs it for a certain period of time. This “someone” is usually a State (like Italy, Germany, the USA) or a large company.
  In exchange for your loan, the recipient promises to pay you regular interest (called coupons) and return the entire lent amount at maturity (at the end of the established period).
  It’s a bit like giving a loan to a trusted friend who returns the sum with a little extra for the trouble.
  The risk? That the recipient of the loan is no longer able to pay you the interest or return the money at maturity (happens if the State or the company have serious financial problems).

• Mutual Funds and ETFs (Investing Together with Others):

• Think of them as a “collective piggy bank“. You and many other people put your money together. This sum is then managed by experts (in the case of Mutual Funds) or automatically follows a market index (in the case of ETFs, Exchange Traded Funds) to buy many different types of stocks, bonds, etc.
  Instead of buying a single stock or bond (which would be risky if that one goes badly), with funds you automatically invest in many different things. This is called diversification and serves to reduce overall risk.
  It’s a relatively simple way to start investing in a diversified way, relying (in the case of mutual funds) on professional management.
  The risk? The value of the “collective piggy bank” can still go up or down based on the performance of the markets it invests in.

• Real Estate (Buying “Bricks”):

• This is a more tangible and perhaps more familiar investment. It simply means buying physical properties like houses, apartments, shops, or land.
  You can earn in two ways: renting out the property and receiving a periodic income (rent), or selling the property in the future at a higher price than you bought it for.
  It’s an investment that usually requires higher initial capital and has management costs (taxes, maintenance).
  The risk? The value of properties can fall, you might have difficulty finding tenants, or you might have unexpected expenses.

Attention! This is just a very first and super simplified presentation. Each type of investment we’ve seen here has its nuances, pros and cons, and different levels of risk.

To Summarize and What’s Next

To summarize, great! We’ve taken a first, quick tour of the world of investments and covered the basic investment concepts. Remember the most important thing from today: investing simply means putting your money “to work” with the idea that it grows over time, but knowing that there is always a risk. And there are different ways to do this, like buying “pieces” of companies (stocks), lending money (bonds), joining other investors (funds), or focusing on real estate. This first article is just the real starting point here on Il Chiaro Finanziario to master these basic investment concepts. Personal finance and investments are vast topics, but the good news is you don’t have to learn everything in one day! In the next posts, we will take one step at a time: we will deepen into each type of investment that we only briefly mentioned today, helping you build on these basic investment concepts.

First Steps Taken! Questions?

Here we are at the end of this first journey into the world of investments here on Il Chiaro Finanziario! I hope this overview has given you a clearer idea of what investing means and what the most common options are.

Remember, it’s just the beginning, and in the next articles, we will explore every aspect calmly and simply.

In the meantime, if you have any questions about what we’ve seen today, doubts about the basic concepts, or simply want to tell me what you think, leave a comment below! I’ll be happy to read and respond to you.

Thank you very much for reading this far. I hope to see you in the next post to continue building your financial awareness together!

See you soon on Il Chiaro Finanziario!