Five basic investment concepts that you should know (2024)

Five basic investment concepts that you should know

You don’t need to take an economics or finance course to learn how to invest, but it is important to...




You don't need to take an economics or finance course to learn how to invest, but it is important to understand these basic investment concepts.

Risk and return

Five basic investment concepts that you should know (1)

Return and risk always go together. The higher the potential return, the higher the risk. You should never blindly pursue high-return investments. Bear in mind your investment goal, investment period and risk tolerance. Always choose an investment that is suitable for you.

Risk diversification

Five basic investment concepts that you should know (2)

Any investment involves risk. You cannot avoid it, but you can manage your risk exposure with the right strategy to reduce the chances of major losses. The simplest and best way is to diversify your investments and spread your risk. An effective way is to diversify your investment to different asset classes, such as stocks, bonds, deposits etc.

Dollar-cost averaging

Five basic investment concepts that you should know (3)

This is a long-term strategy. You regularly (e.g. monthly) invest a fixed amount, whatever the share price. In the long run this balances out the cost of buying shares and lessens the effect of short-term market fluctuation.

Compound Interest

Five basic investment concepts that you should know (4)

Your principal (original money paid in) grows because of the interest earned, so you get a higher return. It’s a snowball effect – the longer you invest, the more you benefit from compound interest. Therefore, it is important to start saving and investing early.


Five basic investment concepts that you should know (5)

For the past few decades, there has usually been inflation in Hong Kong. Your investment needs a return rate that matches or beats inflation. If not, then your money will be worth less.

Find out more from our animation series to help you better understand the basics of investing.


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Five basic investment concepts that you should know (2024)


What are the five basic investment considerations? ›

Five basic investment concepts that you should know
  • Risk and return. Return and risk always go together. ...
  • Risk diversification. Any investment involves risk. ...
  • Dollar-cost averaging. This is a long-term strategy. ...
  • Compound Interest. ...
  • Inflation.

What are the 5 golden rules of investing? ›

The golden rules of investing
  • If you can't afford to invest yet, don't. It's true that starting to invest early can give your investments more time to grow over the long term. ...
  • Set your investment expectations. ...
  • Understand your investment. ...
  • Diversify. ...
  • Take a long-term view. ...
  • Keep on top of your investments.

What are 5 basic but distinct principles that an investor would follow? ›

By following these five essential investment principles — setting clear financial goals, diversifying your portfolio, understanding your risk tolerance, investing for the long term, and conducting thorough research — you can position yourself for long-term financial success.

What are the key concepts of investment? ›

Key Takeaways

Have a plan, prioritize saving, and know the power of compounding. Understand risk, diversification, and asset allocation. Minimize investment costs. Learn classic strategies, be disciplined, and think like an owner or lender.

What are the 4 elements of investment? ›

Vanguard's Principles for Investing Success
  • Goals. Create clear, appropriate investment goals. An investment goal is essentially any plan investors have for their money. ...
  • Balance. Keep a balanced and diversified mix of investments. ...
  • Cost. Minimize costs. ...
  • Discipline. Maintain perspective and long-term discipline.

What are the 3 main investment categories? ›

There are three main types of investments:
  • Stocks.
  • Bonds.
  • Cash equivalent.

What is Warren Buffett's golden rule? ›

Let's kick it off with some timeless advice from legendary investor Warren Buffett, who said “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.” The Oracle of Omaha's advice stresses the importance of avoiding loss in your portfolio.

How does Warren Buffett invest? ›

Warren Buffett's investment strategy has remained relatively consistent over the decades, centered around the principle of value investing. This approach involves finding undervalued companies with strong potential for growth and investing in them for the long term.

What is the 10/5/3 rule of investment? ›

The rule states that stocks, bonds, and cash yield average annual returns of approximately 10%, 5%, and 3%, respectively.

What is the best investment philosophy? ›

Popular investment philosophies include value investing, focusing on shares that the investor believes are fundamentally underpriced; growth investing, which targets companies that are in a growth or expansion phase; and investing in securities that provide a return in interest income.

What are the six 6 criteria for choosing an investment? ›

Our Six Investment Criteria
  • Sustainable above-average earnings growth.
  • Leadership position in a promising business space.
  • Significant competitive advantages/unique business franchise.
  • Clear mission and value-added focus.
  • Financial strength.
  • Rational valuation relative to the market and business prospects.

What should your first priority of investing be? ›

Answer and Explanation: The priority for an investor is sufficient liquidity. Liquidity allows an investor to buy and sell quickly without spending too much money on processing costs. Additionally, it allows an investor to ditch losing investments when a downward trend is observed quickly.

What is the key to investment success? ›

Most successful investors start with low-risk diversified portfolios and gradually learn by doing. As investors gain greater knowledge over time, they become better suited to taking a more active stance in their portfolios.

What are the 3 A's of investing? ›

Amount: Aim to save at least 15% of pre-tax income each year toward retirement. Account: Take advantage of 401(k)s, 403(b)s, HSAs, and IRAs for tax-deferred or tax-free growth potential. Asset mix: Investors with a longer investment horizon should have a significant, broadly diversified exposure to stocks.

What is the 1 investor rule? ›

Key Takeaways: The rent charged should be equal to or greater than the investor's mortgage payment to ensure that they at least break even on the property. Multiply the purchase price of the property plus any necessary repairs by 1% to determine a base level of monthly rent.

What is the simplest investment rule? ›

The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. Dividing 72 by the annual rate of return gives investors a rough estimate of how many years it will take for the initial investment to duplicate itself.

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