When we are starting to enter in the investing world, we basically have two ways to follow.
Passive investing or active investing.

What is the difference?

Stock market is composed by many companies that produce a broad range of products and services. These companies together make the basement of the country productivity.
Because the world follows a growing path in terms of circulating money, number of citizens and consequently numbers of products and services, if we add up the value of all the national company or from a specific sector, and we buy a piece of that collection, over time we will gain thanks to the growth of the worldwide Gross Domestic Product (GDP).

As you can see in the US the circulating money is growing and that money goes into the pockets of those who invest. For example,  I often heard people complaining about riches. The difference between poor and rich is that the riches take assets through the investing practice, while poors take liabilities because they spend all their income for short-term futile purpose. With passive investing method you can buy through a fund a piece of a sector, a country or even the entire world and partecipate in the wealth growing.

An example is S&P500.

This is a bouquet of the 500 largest US companies, in finance this instrument is called “an index”, specifically in this case is called Index Fund. For the 10 years ending December 31st 2019, had an annual compounded rate of return of 13.2%, including reinvestment of dividends.

As you can see in the long run the growth of the Index follows the path of the growth of the circulating money. S&P500 is only an example, there is plenty of index for every nation or sector.

Exchange Traded Fund

Today we have specific financial instruments that mimic the trend of the various indexes. This instrument is called Exchange Traded Fund (ETF). ETFs are exchange like stocks and the main issuer of this instrument are Vanguard or iShare.
An example is SPY, if you have a bank account you can ask your consultant about this option.

If you follow this path, you don’t have to worry about the soundness of a single company where you invest, because you invest in the entire market. Market is tied to the continuous growth of the economic world, propelled by injection of money by central banks.

As you can see the best choice for the average Joe is to put their savings on a S&P 500 fund.
REITs (Real Estate Investment Trusts) is another financials istrument that I will talk about in the future.

Stock picking

The second way is the path that I have decided to follow.
I never liked to go to the restaurant and order the menu, I prefer choose by myself without intromissions.
Furthermore you can earn more money but there is more work to do.
For that reason, pick stock will be the main theme of this blog.

Appendix – 5.1 Currency Value

In the next chapter I will write about compound interest and its role in our wealth creation.

Following chapter 6. The eighth marvel of the world

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