Issue 1 of How to start investing
Before we start investing, it helps to understand why we need to invest in the first place. Why does the old advice of "work hard, get a good job and save money in the bank" not work in today's world?
The answer to that lies in the way money works. Money today works differently that it did in the past. Let's look at how money came about and how it changed over the years.
In the old days, mankind depended on barter to get things you didn't have. So if you were a baker and baked bread and you wanted some clothes, you would have to give someone your bread and get clothes in return. The problem with that was that it was hard to find someone who had clothes that fit you AND wanted bread in return.
To solve this problem, mankind came up with money - an object that everyone would accept and later go and exchange it in return for something he/she wanted instead of having to do barter. Many objects were used as money in the past including spices, salt, seashells, cows etc.... Overtime, gold and silver came to be chosen as the best forms of money. They are durable (they don't get damaged or corroded easily), divisible (you can make coins of various sizes and shapes), portable (they can be carried around much more easily than salt, seashells, cows etc..) and perhaps most importantly, they have intrinsic value - gold and silver are used in electronics, the medical industry etc...To solve the problem of having to carry coins around, mankind created paper money which could be redeemed for gold and silver. This is how paper money came about.
However, in 1971, this was discontinued - paper money could no longer be redeemed for gold and silver. Therefore, since 1971 up until today, money is simply a piece of paper that has value only if you are able to buy something with it. Because money is only a paper, it can be created in infinite quantities.
When too much money is created, the prices of goods rise because after all, that's what all the pieces of paper are meant for - to buy stuff. Hence, if there are more and more pieces of paper but not more goods to buy with it, all that happens is that all those pieces of paper can still only buy as many goods as there are. Thus, it takes more pieces of paper to buy the goods or in other words, prices rise. Evidence of this can be seen in this article.
As shown in the article, $100 in 1970s could buy a lot more than $100 today. Though the article uses the USA as an example, the same concept applied to other countries too.
This is why investing is so critical!
$100 saved in the bank in the 1970s would buy much fewer items today. However, if invested correctly, the $100 would have grown to a much larger sum today and would buy the same or even greater amount of goods than it would have in the 1970s. Likewise, the money we save today will continue to lose value in future if it is not appropriately invested.
Now that we have learned how money works, in the next lesson, we can see how we can use this information to make appropriate investments. Stay tuned for tomorrow's lesson!
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Legally required disclaimer: All information presented is for educational purposes only and is not a advice to buy/sell any stock or other investment instrument. Investors are solely responsible for their profits/losses. The instructor has taken care to ensure accuracy of the information presented but no guarantee of this is provided and the instructor shall not be held liable for any inaccuracies.