Chapter 1: Introduction to Investing

Objective

In this chapter we will learn basics of Investing before diving into the details. We will see differences between saving and investing, history of investing and evolution of markets.

Section 1.1

What is Investing?

Definition of Investing: Investing refers to the act of allocating resources, usually money, to an asset with the expectation of generating an income or profit. This can involve purchasing stocks, bonds, real estate, or other assets.

Importance of Investing:

Wealth Accumulation: Investing allows individuals to grow their wealth over time, surpassing what could be achieved through savings alone due to compound interest.
Inflation Hedge: Investing helps protect against inflation, which erodes the purchasing power of money over time. Assets like stocks and real estate tend to appreciate in value.
Achieving Financial Goals: Investments can help fund significant life goals such as retirement, education, or purchasing a home.

Section 1.2

Difference Between Saving and Investing

Saving: Involves setting aside money for short-term goals or emergencies. Savings accounts offer low returns but are safe and liquid.
Investing: Involves putting money into assets that can grow over the long term. Investments carry varying degrees of risk but have the potential for higher returns.

Example:

If you save $1,000 in a bank account earning 1% interest, you will have $1,010 after one year. If you invest that same $1,000 in the stock market with an average annual return of 7%, you could have approximately $1,070 after one year.

Section 1.3

The History of Investing

Key Historical Milestones:

Early Trading: Investing dates back thousands of years to ancient Mesopotamia, where grain and livestock were traded.
The Birth of Stock Markets: The first stock exchange, the Amsterdam Stock Exchange, was established in 1602. It allowed investors to buy and sell shares of the Dutch East India Company.
Industrial Revolution: The 19th century saw the rise of corporations, leading to increased investment opportunities in emerging industries like railroads and steel.

The Great Depression (1929): Highlighted the risks of stock market investing, resulting in greater regulatory measures and the establishment of the Securities and Exchange Commission (SEC) in 1934.
Technological Advances: The late 20th century brought computer trading and online platforms, making investing accessible to the general public.

Section 1.4

Evolution of Markets

Globalization: Markets have become interconnected, allowing for international investing opportunities.
Emergence of New Asset Classes: The introduction of derivatives, ETFs, and cryptocurrencies has expanded investment options.
Increased Regulation: Government regulations have evolved to protect investors and maintain market integrity.

Example:

The introduction of the internet in the 1990s transformed investing, leading to the rise of online brokerage firms like E*TRADE and Charles Schwab, which made trading accessible and affordable.

Final Takes

Conclusion

In this module, students have learned:

The fundamental concepts of investing, including its definition and importance.
The key differences between saving and investing, highlighting the potential for greater returns through investment.
A brief historical overview of investing, showcasing its evolution and the development of modern financial markets.