Introducing The Concepts of Investing to Students
Benjamin Franklin once said, “An investment in knowledge pays the best interest.”
But even as parents continue to invest in their children’s education and as the children continue to make the best from the investment that their parents have bestowed on them, it’s prudent to ensure that these young people learn the concepts of investing as early as possible.
At some point, the young scholars will have financial responsibilities to meet in their later years. Some will be parents, homeowners, own assets, and will need to know how to grow their assets to live fulfilling lives! Others may have great potential in the business arena. However, the achievement of such goals will be dependent on the mindset and the exposure that the students get during their youthful years.
As the Chinese saying goes, “a journey of thousands of miles starts with a single step.” On this note, students must understand the basic investing concepts such as what an asset is, how they can acquire assets and make them grow, as well as the meaning of liquidity and risk in investment.
What are Assets?
So, what are assets?
Well, an asset refers to a resource bearing economic value that is owned by an individual or an organization with anticipation to produce a future benefit.
(Well that’s the official definition – and yes we know it’s a bit technical, so let’s break it down)
The term ‘expected benefit’ could be cash inflow (for instance, rental income or sales revenue income) or cash outflow reduction (for instance, utility bill, rental, or travel expense reduction), among other desirable economic results.
So it is something a person or a company can own that will provide some kind of future benefit.
In most cases, an economic resource is scarce; its acquisition requires some level of sacrifice and/or hard work. So, every young scholar desiring to own an asset should understand that they’ll have to be committed to the process of asset acquisition, where patience and discipline will come in handy.
There are two major types of assets; current assets and fixed assets. Current assets are held by an individual or business for conversion into cash within a period not exceeding one year.
Cash (both online or paper money) is the most current and liquid form of current assets. There are other current assets that companies have which include things like inventory.
On the other hand, fixed assets are held long-term (over one year) to produce a defined economic benefit. They include plants, land, building and equipment. Things like a production plant or truck owned by a company is an example of a long-term asset.
How to Acquire Assets
Possibly you’re now wondering, “what can I do to own a house?” or “How can I acquire a fleet of public service vehicles 10 or 15 years from now?”
There are various options for acquiring assets. They include outright buying, hire purchase and leasing. Outright buying involves paying for the entire price of an asset, and the ownership of the asset is transferred to the buyer entirely. This is a viable option when an investor has enough money to settle the relevant costs for the asset acquisition.
On the other hand, hire purchase and leasing are suitable asset acquisition options for investors who don’t have sufficient money to acquire permanent ownership of the asset in question instantly. In hire purchase, the buyer/investor makes partial payments or installment payments for the asset for a defined agreed-upon period, after which, the purchaser acquires full and permanent ownership of the asset. When it comes to leasing, an investor makes defined regular payments for a specified period for them to be allowed to use the asset for a given period. Once the lease period lapses, the lease agreement can be renewed or the investor can opt to buy the asset outright. Otherwise, full ownership goes back to the primary owner.
So you can own an asset without having to pay full price (pretty neat eh)!
How Assets Grow
Assets usually grow through the returns arising from the use of money lent out or through the increase of the value of an asset.
The value of assets can appreciate and or depreciate in many ways.
Appreciation of Assets – An Example
For example, a house purchased may appreciate in value over time as the population in the city increases and more people are willing to pay more for it than it was purchased for. For example, if a house was purchased for $100,000 in 2010 and 10 years later, you go to sell it, people will be willing to usually pay more for it – say for example $150,000. Therefore, your house appreciated by $50,000 (New home value $150,000 – Original Home Purchase value 10 years ago $100,000). That $50,000 is the net appreciation and that is how your house (your asset) grew!
There are other ways assets grow. For example, if you take some cash and put it in a savings account. The bank will pay you interest for holding your money in the bank. That interest is extra and how your cash grew and appreciated. In our FREE app, we share these concepts of growth of assets via interest to reinforce the concepts. See question 7 from our Grade 8 Math Class on Financial Literacy:
Image source: WazzCards App – Grade 8 Financial Module
Depreciation Of Assets – An Example
On the other hand, assets can depreciate in value (i.e. someone is not willing to pay as much as you paid for it initially). A great example of this is a car. As cars age, they usually “depreciate” in value. This is because the wear and tear of using a car, the quality of the drive makes the assets less valuable over time. People are willing to pay less for it than what the original price was. Say, for example, your first car is $10,000 and you sell it after 5 years. The price you can get is only $4,000 today. So your car (your long-term asset) now “depreciated” in value by $6,000 (Original Price $10,000 – New Selling Price $4,000 = $6,000 is the depreciation value)
Other Important Financial Concepts for Investing
Liquidity and risk are other financial concepts for investing that students need to have at their fingertips.
Liquidity is simply the ease at which an individual or a company can convert an asset or an investment into cash without causing a significant change in the price of the item. As mentioned earlier, cash is regarded as the most liquid asset while fixed assets are mostly the least liquid. Individual investors and companies must have both highly liquid assets and least liquid assets. The former helps an entity to meet its short-term financial obligations while the latter is paramount for future, long-term financial gains.
Risk refers to the possibility of an investment losing its partial or full value. Liquidity usually carry some risk. For instance, a company’s stock shares can be sold any time as long as the relevant market is open.
Also, poor financial performance of the company can result in a decrease in the value of the shares. This can leave a significant loss to the investor upon selling the shares. This is a risk.
Students need to have some basic knowledge on investing in readiness to start ventures that will see them have financial freedom in the future. They need to know to understand the basic concepts of assets and investment and why they need to consider risks in their investment ventures.
Knowledge of the ways for acquiring and growing assets also forms the foundation of the great young investors of tomorrow. At wazzCards, we are committed to sharing financial literacy concepts regularly for our community and the society at large. We encourage students, teachers and parents alike looking to learn more about financial literacy concepts to check our FREE app at: https://app.wazzcards.com/
Investment is an integral part of financial freedom as assets can increase cash inflows and/or reduce can outflows. However, investments are inherently risky, and so, it’s essential for an investor to assess risk level before jumping into an investment.