Investing is quite like a game

There is something at stake, and you could win, or lose or draw. And like a game, there are some basic rules to investing, there are some premises inside of which this game takes place. So after knowing that investing is a good habit that stands you and the nation in good stead, we then look at what are the basic premises in which investment takes place. Now, if you play football, you know that there are certain premises, certain rules or assumptions like the aim is to score a goal, the team that scores the maximum goals within the stipulated time wins the game and so on. Likewise, the game of investing too has a premise or certain rules. Lets look at them:

• This game is about gains and returns: The game of investing is all about getting your money to grow by putting it to use in assets of value. So you win when the money you invested grows. Now this can happen in two ways – capital gains and regular income flows. In case you invest your money (capital) in buying land or shares you would win if the price of the asset (land or shares) grew over a period of time. The profit that you get from the sale of the asset at an increased price is called capital gains.And the dividends or rent you get on a regular basis from the asset is called income flow. On an investment you could get both capital gains and income flows or either or them.
• The risk factor: Investing always comes with a risk factor. There is always some sort of risk involved in investing. So when you invest in shares, there is a risk that the price will fall and you would lose your money. When you invest in a safe and secure bank savings account, chances are that you might not beat the inflation rate and lose out on the value of your money. So bear in mind that there is always a risk associated, a chance associated with investment.
• The risk and reward relationship: Now, there is a direct relationship between risk and reward. Generally speaking, more the risk more is the reward. Philosophically speaking, the reward is meant as an incentive for the willingness to take a risk. So more the risk, more the reward. So the game the investor is playing is to maximise the reward while minimising the risk. The dream would be to have no risk and maximum of rewards. Smart investors keep looking out for such occurrences. But then these utopian occurrences where there is no risk and maximum rewards are far and few. Now, there are avenues where the risk would be maximum and the rewards would not match these rewards. Needless to say, such investing avenues are to be avoided.
• Risk first and then rewards: While this relationship is easy to understand. It is important to note that you have to take risks first and then the rewards follow. You need to commit your money first and then get the rewards. And risks associated with investing keep changing over a period of time. A company that you invested in three years ago might become a risky investment as the profile of its business changes. Or a piece of land you brought five years ago might lose value because it might be located in an earthquake zone. The point is risks keep varying from time to time. Smart investors have the vision to look out for risks and reduce the their impact, when they arise.

All in all, as investors you would play to see the value of your money grows over a period of time by investing into assets, or you get a steady flow of money from these assets. You get rewards. But, investing involves risks and usually more the risks more the rewards. Sometimes, there is more risk and little or no reward, The winner in the investing game is someone who keeps an eye on reducing risks and maximising rewards. Happy Investing! Canbank Mutual Fund

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