Understanding Investment as a Complete Beginner

Introduction

Qirad was a basic financial instrument used in the medieval islamic world. It was a form of investment in which an arrangement followed between the agent and investors. In Qirad, The investors entrusted an agent with the capital, who later traded it in hopes of making profit. After that, both the parties received a previously settled portion of the profit. 

Similarly, In 13th century Italy, a medieval contract known as Commenda was practiced. Commenda was an agreement between an investing partner and a traveling partner to conduct a commercial enterprise, usually overseas. 

Back to the present day, Investment is defined as ‘commitment of resources to achieve later benefits’. Investment can be a broad and complex topic if one wishes to dive deeper. It has many layers, strategies and terminologies to study.

In the most simple terms, Investment can be explained as allocating your capital or resources to an asset in hopes of making profit. Investments can be high risk and low risk both, most of the times, high risks investments generate high profit but are also prone to high loss and vice versa. 

For example, suppose you lend a person 10k on a 2% return, or maybe you invest the same amount to a company and get a share of both loss and profit. Or maybe you opened a savings account which gives you 3% return. So basically you are an investor before you know it!

Most of the time, when a person talks about investing, they refer to stock markets, bonds, mutual funds etc. A project where they can invest their money to generate a higher income within a shorter period of time with the risk involved.

What is Investing?

On and On, We can break investment into following points,

• Investment is allocating your capital to an asset to generate more income. 
• There is always a measure of Risk involved in Investment. For example, Fixed Deposits, recurring deposits, Debt Mutual Funds, Mutual funds, Real Estate are some low to medium risk investments. Stocks, Share Markets, IPOs, Angel Investing are some high risk investments. 
• Investors run the risk of bearing loss of some or all the capital they have invested. 

Investment Terminologies

If you are completely new to Investing, It will be helpful to know a few basic terms relating to Investing as they will be recurring in the text. Here are some key concepts:

1. Stocks (Equity): A share in a company’s ownership. Example: If you own 1 share of Tata Motors, you own a small part of the company.
2. Bonds: A loan given to a company or government. You earn fixed interest on it. Example: Government Bonds, Corporate Bonds.
3. Mutual Funds: A pool of money collected from investors and invested in stocks, bonds, etc. Managed by professional fund managers. Example: SBI Bluechip Fund, HDFC Index Fund.
4. SIP (Systematic Investment Plan): Investing a fixed amount regularly (monthly/quarterly) in mutual funds. Reduces market risk and helps in rupee cost averaging.
5. NAV (Net Asset Value): The price of one unit of a mutual fund. Example: If NAV = ₹50, investing ₹5000 will buy 100 units. 
6. Index (NIFTY 50 & SENSEX): 
   1. NIFTY 50 – Top 50 companies on the NSE (National Stock Exchange). 
   2. SENSEX – Top 30 companies on the BSE (Bombay Stock Exchange). These track the market’s performance.
7. Bull Market & Bear Market
   1. Bull Market → Market is rising, stocks go up.
   2. Bear Market → Market is falling, stocks go down.
8. Dividend: A profit share paid by a company to its shareholders. Example: If Reliance gives a ₹10 dividend and you own 100 shares, you get ₹1000.
9. Market Capitalization (Market Cap): The total value of a company in the stock market.
   1. Formula: Market Cap = Stock Price × Total Shares.
   2. Types:
      1. Large-cap (Safe, stable) → Example: TCS, HDFC Bank.
      2. Mid-cap (Moderate risk) → Example: Tata Elxsi, Minda Industries.
      3. Small-cap (High risk, high return) → Example: Brightcom Group, KPIT Tech.
10. IPO (Initial Public Offering): When a company sells shares to the public for the first time. Example: Zomato IPO, Nykaa IPO.

For More Investment Terminologies; Check out this pdf.

Objectives of Investment

One of the main objectives of Investment is to generate maximum profit with the minimum possible risk involved. Investors can opt for different routes and decide which investment option would be best for them according to risk, returns and period. Below are some of the objectives of Investment

Capital appreciation

Capital appreciation refers to an increase in the value of an asset over time. It occurs when the market price of an asset rises above its original purchase price, leading to a gain in value without selling the asset. This strategy is primarily concerned with long-term growth and is most commonly seen in retirement plans such as 401(k) and IRA accounts. Investors who focus on capital appreciation aim to grow their initial investment over time by increasing the value of their assets. They are not concerned with day-to-day market fluctuations but keep an eye on fundamental factors that can affect long-term growth.

Current Income

Current income, on the other hand, refers to generating regular income from investments. This can be achieved by investing in stocks that pay consistent and high dividends, top-quality real estate investment trusts (REITs), and highly rated bonds, all of which produce regular income. Blue-chip stocks are often a good choice for this strategy. Retired individuals can particularly benefit from current income investments, as they provide a steady cash flow to cover expenses.

Capital preservation

Capital preservation is focused on protecting the original amount of investments. This strategy is mostly associated with individuals, often retirees, who do not want to risk losing their invested money or outliving their savings. Safety is the top priority, and investors following this approach typically invest in low-risk options such as certificates of deposit (CDs) and savings accounts. Capital preservation is ideal for older individuals who do not have the time or resources to recover potential losses.

Speculation

Speculation involves taking higher risks with the aim of earning large returns in a short period of time. Speculative investors jump in and out of stocks, seeking capital gains through quick trades. They are primarily interested in quick profits and often use techniques such as shorting stocks, trading on margin, options trading, and other high-risk methods.

Many people become speculators with the misguided goal of becoming Reach. Always remember this, the money you put at stake should be the one you can afford to lose – without jeopardizing your current livelihood or ambitions. 

Conclusion

Investment is a powerful tool for growing wealth, generating income, and securing financial stability. From historical financial instruments like Qirad and Commenda to modern investment strategies, the core principle remains the same—allocating resources to achieve future benefits. Whether an investor seeks capital appreciation, regular income, capital preservation, or high-risk speculation, each investment strategy carries its own potential rewards and risks. If you want to learn how to start investing, stay tune with us!

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