In the previous post, I wrote about investment opportunities where I didn’t discover the right way of how to invest in it, or I not have enough money to invest in it like Real Estate.
In this post, let’s consider what I can do as a student and where I invest my money. Keep in mind if the student can do it so anyone can do it even with small income!
The investment opportunities I will discuss in this post are:
- P2P / Crowdlending
- Shares
- ETF
- Cryptocurrencies
1) P2P
First, let me explain how regular banks work and how they make a profit.
If you put your money into a bank, they will keep your money safe. When you need to get your money back, you will visit your bank or ATM and withdraw as much as you need. But most of the time you would leave your money to the bank and don’t care about them.
The bank will use your money for loans to other people or businesses who will want to borrow them. The borrower will pay a certain percentage for the loan to the bank for this loan. Interest, the borrower, will pay is what will be profit for the bank.
Nowadays, banks share a small part of this profit with their customers. Banks will give most of its services (keeping money in safe, money transfers, etc.) for free and even give from 0% to 2% interest rate on your savings. On the other hand, they will charge 5% to 20% to the borrowers to whom they lend your money. The bank will keep most of this profit for themselves. What I jsut described is the situation today.
Role of P2P platforms
In contrast with banks, P2P switch roles with you. You will take more risks on your shoulders in return with higher interest rates on your money. P2P platforms will not risk their money and make some percentage of 3% to 5% of the money you will receive. (usually, they will show already reduced interest rate on loans by their fee; therefore, it seems there are no fees, and everything is for free.) We can also shorten ‘crowdlending’ as P2P = peer-to-peer, i.e., people (borrow) to people, but can also be P2B = people to a business.
In short, in crowdlending, you lend your money to other people or businesses with the help of the middle platform/company. You wear more risks on your shoulder. Therefore, P2P platforms can offer you better interest rates than an average savings account. The interest rate can be around 5-13% from borrowing to people and even more if you invest in some risky businesses.
Not everything is positive
Drawbacks of P2P are that it is a new form of investing, hence not tested in times of crisis. The rule is:
‘Something that existed for X years will most likely continue to exist for another X years.’
P2P platforms are usually no longer than ten years old. Therefore, it is possible to wake up one day and found out your platform went out of business with all of your money.
Another risk may be with currency exchange. For example, I have my salary in Czech krone. Therefore, if the exchange rates change for more than 10%, it may cut all my profit for that year. On the other hand, it may also make my profit increase by the same amount.
Why & How to invest
Apart from the risks I mentioned earlier, P2P is now one of the best options you can choose. It is easy to invest – you can start with as small as 15-100 Euro (depends on a platform), and there are no direct fees.
Moreover, many platforms offer a buy-back guarantee, so if the borrower stops paying, the platform will work as an insurance company and at least will give you your money back. Besides, If you want to invest in P2P, you don’t need to do time-consuming research as it is quite simple to invest. On the top, P2P offers a high profit of around 10%. More on how to invest in P2P, you can find in the ‘Investment strategy‘ above.
2) Shares
Another option for investment is the shares market. A stock is ‘one of the equal parts into which a company’s capital is divided, entitling the holder to a proportion of the profits.’ What does it mean? For instance, instead of buying a whole Google company, you can buy only a small piece of Google Company, not worth millions of Dollars. You can not speak much into Google’s leading and business decisions, but you can have a part of its revenue.
A small example for clarification: If Google distributes 200 shares, all for 1 Euro. Then the total market value of the company is 200 Euros. If you buy two shares and after a year will Google make 100 Euro in profit, you will own 1 Euro of this profit. Additionally, you will still hold two shares with value 2 Euro if the price will remain the same as one year ago. That makes a 50% increase in one year to the final cost of your portfolio 3 Euro. Now add zeros behind those number up to your possibilities 😉
P2P vs. shares
But why are stocks as essential to have as P2P, or even more important? Because their value may change even tens of percent in one year. In opposite, P2P provides relatively predictable income that will not change much.
For instance, If I buy shares that offer a dividend, I may achieve a similar income. Usually, the dividend is about 2-6% for the first year, but I may also earn money thanks to the increasing value of my shares. For the first few years, it may be less or the same profitable as P2P. But in +-5 years, those 2-6% dividends may become 6-15% of my initial investment, and the value of my shares will likely increase either. When you sum it up, it will exceed the profit from P2P. This increase in company value may easily be even by 30%+ per year in some cases.
I can not expect my portfolio to increase by tens of percent in P2P in a few years, like in shares. The danger of this is that I can also lose money faster than in P2P. Shares are trickier and harder to invest in than P2P. One must be careful while investing in the stock market.
The proper strategy of investing
Allow me to explain my easy thou powerful strategy about how to invest in shares. I invest entirely in long-terms. Long-terms means at least three years or better ‘forever.’
Doing this, I will get a passive income in the long-term and fewer worries during times. Two incredibly important things for me.
Besides, if I make the wrong decisions, ‘time will heal everything.’ You can look at most shares, and if you look at it from a long perspective, most of them increase their value in the long term. Investing for years is the main reason I seek to prefer shares with the dividend – so I can hold them ‘forever’ and still collect some passive income from them.
(Be careful as the companies that went into bankruptcy are not on the stock market anymore. That’s why it looks like the stock market only rise, but the risk of losing money is in every possible investment)
How do I choose the right investment?
In the first place, I study & work in IT; therefore, I follow some news about the ‘tech industry.’ After I think that some product of some company look promising or I’m even buying it myself, then this company would be an excellent investment tip.
If I use Microsoft Office, Windows 10, and think they have no concurrency, I would add Microsoft to my watch list and follow news about this company. If I think the next iPhone will be a revolution, not an evolution from leaked reports, I would add Apple to my watch list as well.
(Similarly, if you are hair-dresser, you know what shaver you are using as is possible the best, what shampoo is most healthy and your costumers are using, etc. Then the producer of those products should be on your list. Just get inspired by your profession and fields you understand.)
After some time, when I will feel comfortable and a little more familiar with the company business, I would consider buying some shares and be part of this successful company.
Moreover, I’m focusing on ‘number one’ companies that look to be around for years like Coca-Cola. Another great tip is the dividend aristocrats. In this list are companies that offer and increase dividends steadily for 25+ years.
3) ETF
Shares are a great way of investment, but they are not providing much diversification when you don’t have much money for buying multiple different companies. Also, some shares can be volatile, and the value of your portfolio may change a lot just in a few days. To avoid the volatility of stocks and diversify and avoid the higher fees of managed funds, ETF represents the right option.
Imagine you buy shares of company A. Then its value decrease by 50%, the same as your investment, thanks to some unexpected reason. How to avoid this situation? Just diversify your money in more shares, for example, five. In that case, if the other four shares will remain at the same price, your investment will drop only 10%. Still wrong, but not as bad as 50%.
You can buy all those five shares yourself and kill time on research what are the top companies and spend more money on fees. Or you can buy ETF fond, which does all this for you for a usually small commission.
Now imagine the opposite scenario. You buy five shares (or ETF), and the value of 4 of them will be similar to value when you purchased it. But the value of the 5th company will increase by 50%. Great! But the value of your portfolio will increase only 10%. This will provide some stability into your portfolio in exchange for not getting high bonuses either.
How do I choose the right investment?
Similarly, as in shares, but at this time, you don’t think about a specific product of one company, but products range in general.
For instance, if you think that virtual reality will be a real boom in future years. Find some ETF that is focusing on companies producing equipment and software for virtual reality.
If you think China still has plenty of growth potential, buy ETF that is focusing on companies that operate in China.
In conclusion, ETF will not probably deliver bonuses to you like a 20% increase in one year. However, ETF will lower the probability of losing the same amount of money and help you to diversify your portfolio. Invest only for the long term and find some dividends paying ETF.
4) Cryptocurrencies
Cryptocurrencies are a phenomenon of the last decade. In essence, it is a larger and larger database of transactions. And we called this number in transaction ‘money’; therefore, we look on Cryptocurrencies as currency and call it like this.
In the same way, we can call it anything else like ‘production code’ in a factory where it tracks If the product you bought is original and not fake.
Behind every cryptocurrency is a blockchain. The blockchain is the main technology that provides security and validity for every transaction. The blockchain validates that every address is precisely the amount that should be there, and there is no fake money.
Why & How to invest
Now the question is: ‘Why and how should I invest in cryptocurrencies?’. There are at least two reasons ‘why.’
Firstly, if we look at it from a ‘Collectable’ point of view. For example, Bitcoin, like many others cryptocurrencies, is limited by its amounts, so its value is most likely to increase in time as Bitcoin becomes less available. This argument is strongly supported by a vast mass media campaign which helps to put crypto into people’s minds, therefore making the value of crypto unconsciously slowly to rise. A similar argument if we look at crypto as ‘Digital gold’ – It is valuable, rare, and hard to extract; therefore, it keeps its value, which slowly rises.
Another good argument is – it is deflation currency; therefore, its value should rise, not decrease in opposites of conventional currencies like Euro or Dollar. And there is more, and I will write later about as it would make this article too long. Answer to question ‘how to invest’ I regularly update in the above section ‘Investment strategy’ so better look there to be updated.
Strategy
The strategy should not be day-trading. Only buy some crypto, wait a few years, and then you can sell it with profit. Easy 😉
Just keep in mind that you should not put more than 5-10% of your assets into crypto as it is a risky investment. At the same time, having no money in crypto may be even more hazardous.
Either way, keep in mind that crypto will not generate you any income in time. For this reason, I would recommend other forms of investments, at least from the beginning.
There are many things to do
There are many investment opportunities. I don’t try finding some super-new way of investing in this post. I do what other people do and share the result. Then I let time flow and see what works and what doesn’t work. If something is promising, I deposit more money into it. Otherwise, I close that way and look for another option.
I only described the basics of where to look. For more details, I recommend the ‘Investment strategy’ above and my future posts, where I will focus on everything in more detail.
