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By making good investments, you can build wealth over the long term and achieve your financial goals. However, if you are new to the world of investing, it can be challenging to know where to start. Today, let’s take a look at the basics.

Only Invest Money You Don’t Need

Before you start investing, make sure you only invest money that you won't need in the short term and that you can afford to lose. Investments are typically long-term assets, and it will take some time before you see a return. Therefore, you should ensure that your daily life and expenses are not dependent on your investment. Only invest money that is truly available to you.

Lump Sum or Dollar-Cost Averaging: Choosing Your Investment Approach

In essence, there are two possible approaches:

Lump-Sum Investing

With Lump-Sum Investing, you invest a larger sum of money at once in the market.

Advantages:

• Potentially higher returns, especially if the market rises over the long term.

• The entire sum is invested immediately, potentially leading to faster growth.

Disadvantages:

• Higher risk if the market drops in the short term, as you may have entered at an unfavorable time.

• Psychologically challenging to invest a large sum at once, particularly in volatile markets.
  
  

Dollar-Cost Averaging (DCA)

With Dollar-Cost Averaging, you invest regularly over a set period, regardless of current market prices.

Advantages:

• Reduces the risk of entering a market that drops in the short term, as you invest over a longer period.

• Smooths returns over time and reduces emotional decisions based on short-term market fluctuations.

Disadvantages:

• You may miss out on potential returns if the market rises over the long term, as you do not invest the entire sum at once.

• There are fees and transaction costs that can accumulate over time.

The Effect of Interest and Compound Interest

The Effect of Compound Interest in Stock Investments

An example of an investment that can generate significant long-term returns is stock investments. For instance, if you invest €1,000 in stocks of a company that generates an average annual return of 5 percent, after one year, you would have €1,050. If you leave the initial €1,050 in the portfolio for another year and continue to achieve the same average return of 5 percent, the value of your stocks at the end of the second year would be €1,102.50. After 30 years, your initial investment of €1,000 could have grown to over €4,300 due to the compound interest effect.

If instead of €1,000, you had invested €5,000  and earned the same average return of 5 percent, you could have over €21,609 after 30 years due to the effect of compound interest. This shows that larger investments can also generate significant returns in the long run.

However, please note that this is a simplified example. The stock market can be volatile, and there is no guarantee that a specific return will be achieved. Therefore, it is important to carefully consider your investment decisions and sufficiently inform yourself before investing.

The Effect of Interest and Compound Interest on a Savings Account

Interests and compound interests also play a role in savings accounts, albeit to a lesser extent compared to other investment options such as stocks. When you deposit money into a savings account, you earn interest on your capital. These interests are usually credited to the total amount in your savings account, gradually increasing the capital on which you earn interest. Over time, the compound interest effect can help grow your balance on the savings account as you earn interest on the interest already received.

However, the compound interest effect on savings accounts is typically less pronounced than with long-term investments like stocks because interest rates on savings accounts are often lower, and the interests may not be credited as frequently as with other forms of investments.

Apart from the low interest rates, it's important not to overlook the continuously rising inflation. This can result in savings accounts potentially not yielding significant profits or even leading to a depreciation of the money's value. Therefore, it's advisable to consider these factors when selecting a savings instrument and to consider alternative investment strategies if necessary.

Dividends

Payouts in the form of dividends are like gifts for shareholders of a corporation or any other company. They represent a portion of the profit that the company has earned and shares with its investors. However, while dividends undoubtedly play a role in long-term investments, they should not be the sole criterion for selecting a stock. A high dividend yield alone does not necessarily mean that the company is financially stable or has significant growth potential.

It is important to consider the company as a whole, including its financial position, growth prospects, and market position. Focusing too much on dividends can lead to neglecting these other critical aspects.

A savvy strategy is to reinvest dividends by automatically investing the received amounts into additional shares of the company. This practice, known as dividend reinvestment or accumulation, is adopted by some investors automatically. Through this compounding effect, significant value appreciation can be achieved over time.

Investing with or Without a Broker?

A broker is a person or company that acts as an intermediary between an investor and a stock exchange. If you want to buy or sell stocks or other securities, you can do so on the stock exchange, either with or without a broker. The advantage of a broker is that they can also help you develop an investment strategy and inform you about the best investment opportunities. It is important to choose a trusted and experienced broker to ensure that your investments are in good hands.

If you want to invest without a broker, online platforms like Bitpanda or similar providers offer a way to do so. 

Possible Additional Costs and Fees in Stock Investments

If you want to invest in stocks, you need to be aware that in addition to the costs of buying the stocks, additional costs and fees may apply. These include trading fees, administration fees, or account fees charged by brokers. These fees can affect your investment result and should be taken into account when choosing a broker. 

Taxes on Investments

Unfortunately, not all of the profit belongs solely to you, as the government also wants a piece of the pie. In some countries, gains become tax-free after a certain holding period, but in many countries, you must pay taxes regardless of the holding period. In Austria, for example, currently, one must always pay 25% on capital gains from cash deposits (e.g., interest from savings accounts and checking accounts) and non-certificated other claims with credit institutions. For all other income, such as securities taxation, it is stipulated that both securities income such as interest, dividends, and fund income, as well as capital gains from capital assets (e.g., from stocks, bonds, fund shares) and derivatives (e.g., certificates), are subject to capital gains tax at a rate of 27.5 percent.

Therefore, it is advisable, before you start investing, to inform yourself about the specific tax laws of your own country and, if necessary, seek professional advice. Additionally, you should be aware that depending on the investment platform or broker, taxes may be automatically deducted, known as "tax withholding." It is therefore advisable to clarify the tax implications in advance and, if necessary, consult with a tax advisor or financial expert to avoid unpleasant surprises.

Various Investment Opportunities

Now that we understand the basic concepts, let's take a look at the investment classes in which one can invest.

• Stock Investments
  A stock is a partial ownership of a company. When you buy stocks, you acquire a share in the company and have the right to participate in decisions and profit from earnings. Stock investments can be very lucrative but also come with risks. The stock market can be volatile, meaning stock prices can fluctuate rapidly. There is also the risk that the company in which you invest performs poorly and the value of your shares decreases.

• ETF Investments
  An ETF (Exchange Traded Fund) is an investment fund that is traded on the stock market like a stock. ETFs contain a variety of assets, such as stocks, bonds, or commodities. When you invest in an ETF, you buy a small share of a broader portfolio of assets. ETFs can be a good way to achieve diversification, meaning to reduce risk by investing in different assets.

• Metal Investments
  Metals like gold and silver have been a popular form of investment for centuries. Metals can be a safe investment as they often serve as a hedge against economic uncertainty and inflation. Metals can also be invested in the form of jewelry and collectibles, although this form of investment is less liquid than buying physical gold or silver.

• Commodity Investments
  Commodities are natural resources such as oil, gas and grains. Commodities can be a good way to diversify a portfolio and hedge against inflation. However, commodity prices can fluctuate strongly and are often more volatile than stocks or bonds.

• Cryptocurrency Investments
  Cryptocurrencies are digital currencies that are decentralized and not controlled by governments or banks. Cryptocurrencies can be very volatile, but they also offer the opportunity for quick profits. But beware: Cryptocurrencies are not regulated, and there is no guarantee that they will have value in the future.

Possible Investment Areas

I do not give specific investment recommendations or tips for certain stocks or cryptocurrencies. However, there are some general rules and principles that can be helpful in selecting investments to minimize risk and achieve long-term value appreciation.

There are certain sectors that can be considered promising for investment. One of these sectors is the renewable energy sector, as it has high growth potential due to the increasing need to switch to clean energy sources. Another promising area is the medical and health industry, as the population worldwide is aging and the demand for medical services and innovative therapies is increasing.

Compared to individual stocks, ETFs generally offer broader diversification and thus better risk diversification. However, they are not inherently safer than other forms of investment, as there are also risks and fluctuations in the market.

Before investing, one should always carefully examine the fundamental data of the company, such as revenue, profit, and debt situation. A thorough analysis of the industry and market environment can also help in selecting the right stocks. When it comes to cryptocurrencies, one should be particularly careful and do thorough research beforehand, as they can be very volatile and generally carry a higher risk.

Be Careful of Investment Influencers on Social Media

There are a plethora of investment gurus on social media claiming to be experts in the field and can help you get rich quick. However, it is important to exercise caution before listening to their advice. Many of these influencers may not have actual experience or qualifications in the financial industry and could turn out to be unreliable advisors. So before following such a person and trusting them, you should take a closer look at their qualifications and successes and ensure that their advice aligns with your own financial goals and risk tolerance. Don't blindly rely on investment influencers, instead, research thoroughly and make decisions based on facts and a smart strategy.

Closing Words

Investing can be an effective tool to achieve long-term financial goals, but it also requires time, attention, and a smart strategy. So before investing money, keep your risk tolerance, financial goals, and expenses in mind. I cannot stress enough, make sure to only invest money that you will not need in the long term and that you can afford to lose.

If you follow these tips, you can build a broadly diversified portfolio in the long run that can help you achieve financial stability and prosperity.