Imagine that one day you decided to put all your savings under a mattress to save them. If you forget all this money and then leave it alone for a year, it will not grow. There will be exactly as many as you put there in the first place.
In fact, in real terms, value can be underestimated when it is placed there, because the cost of living is likely to increase over this time.
Now imagine that you used this money instead to buy financial assets such as stocks or commodities. Instead of sleeping, your money will have much greater growth potential, as the value of these stocks or goods may increase. However, of course, there is always a risk of devaluation.
Trading in financial markets is to balance these risks with potential rewards and select assets that may change in your favor. As we will see, if you do this reasonably and reasonably, the reward can be much more than just letting your money sit on your bank account (or under the mattresses).
Investing Against Trade
What we describe above is called "investment", which is basically a form of long-term financial trading, which includes the purchase and holding of financial assets for several months or years.
In fact, it is entirely possible that you are already investing in financial markets with some potential - perhaps only passively. For example, if you have a retirement plan, you are investing the money you are currently earning, expecting it to grow and become more valuable after retirement.
Pension companies usually invest this money for you for a fee. However, in most cases you may have an opinion about the financial instruments in which you invest your money. As shown in the table below, some simple solutions can have a significant impact in the future.
Looking at the graph, you can see that saving £ 100 in cash in 1986 would cost just £ 38 in 2014 due to inflation. If you invested £ 100 in the UK stock market, you can get a return of about £ 1120.
But long-term investing is not the only way to participate in financial markets, there is also active trading, sometimes known as speculation.
While investors usually focus on the long-term value of assets and try to create a portfolio that will work well in the future, active traders tend to focus on short-term market movements, with some participants making hundreds of transactions daily.
If you decide to focus on a long game, make several transactions a year, or think that every small price movement is an opportunity, it depends on you and your personality and on how much time you can devote to trading.
We will consider this topic in detail in the course “Planning and Risk Management”, but at the present time it is important to note that there are many different ways of trading and different types of traders. Regardless of your interests, skills or priorities, there is always a form of trading that suits you.
One of the main differences between traders is the type of assets that they trade, and this is what we will begin to consider in the next lesson ...
• Financial trading gives you the opportunity to grow your money, but there is always a risk of losing money
• Investments focused on the long-term value of assets
• Active trading focuses on short-term price movements
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