What does it mean to earn money from investments? Explained in simple terms

Learning to do so means developing a decision-making system that allows you to increase your capital, regardless of the market cycle. This involves creating an investment strategy that combines analytics, risk management and long-term thinking.

How to learn to earn money from investments?

The first step is to grasp the fundamentals: how markets work, what assets are, why they grow, and the conditions that cause them to decline. The better you understand the market, the less likely you are to act emotionally.

The second component of learning is regular practice. Like any profession, investing requires not only theory but also experience. Start with small amounts and different instruments, gradually diversifying your portfolio. This will enable you to observe how your portfolio behaves, how markets react to news, and which strategies are effective.

Learning to invest also means being able to admit mistakes. Even experienced investors suffer setbacks, but it is by analysing these decisions that they become stronger.

An important element is information discipline. Consider what sources you read, whose experience you learn from, and how critically you evaluate information. You need to be able to work with data, identify trends, study financial reports and monitor institutional investor behaviour. When it comes to venture capital, analysing technological potential is key.

Define your investment goal and timeframe

A clearly defined goal is the foundation of any investment strategy; without one, your actions will be erratic. Defining your goal will help you to understand the required level of return, the acceptable level of risk, and the most effective instruments. The basic principle is simple: the goal shapes the strategy, and the strategy shapes the portfolio.

Your goal should be measurable and specific. Examples include saving to buy real estate, creating a safety net, providing for your children's education or preparing for retirement. As well as defining your goal, you also need to outline the timeframe within which you want to achieve it because the investment horizon determines the available instruments.

Long-term goals (10–20 years) allow you to use dynamic assets with high growth potential, such as stocks and venture investments. Short-term goals (one to three years) require more stable instruments with minimal volatility. It is not only important to know ‘how much’ and ‘why,’ but also ‘in what time frame.’ This will help you to avoid panicking during market fluctuations.

Assess your acceptable level of risk

Although risk cannot be eliminated, it can be controlled. This involves analysing what portfolio fluctuations you are prepared to endure, both psychologically and financially.

The first step in risk assessment is to analyse your financial stability. If you have a financial cushion, your debts are under control, and your income is predictable, you can afford to invest more in risky instruments. If not, it is worth focusing on less volatile assets.

However, risk is not only about personal finances; it is also about your attitude towards market fluctuations. Some people remain calm when their portfolio declines by 20–30%, while others become anxious when it falls by just 5%.

In the venture capital environment, risk is assessed based on the competitive landscape, the quality of the team, the market’s size and the product's scalability. For traditional investments, risk is analysed through volatility, asset liquidity, macroeconomic factors and historical performance.

Your task is to understand what level of risk corresponds to your investment horizon. A long-term portfolio may include riskier assets because time can mitigate fluctuations. A short-term portfolio, on the other hand, requires stability.

Choose a broker and open an account

This is one of the key decisions that shapes the quality of your investment experience. The broker provides access to markets, instruments, analytics and services, while the account type determines the tax conditions and the effectiveness of your overall strategy.

The most important criterion for choosing a broker is reliability. Pay attention to the company's history, licence status, technical platform quality and transaction execution speed.

The second criterion is the commissions charged for transactions, withdrawals, and services. Low commissions are particularly notable for those planning to invest regularly or trade actively.

The third criterion is access to analytics and a user-friendly interface. If you don't want to spend time dealing with technical details, a straightforward platform will be a significant advantage.

Once you have picked a broker, you need to decide on the type of account. The most common options are a regular brokerage account and an individual investment account (IIA).

With a regular brokerage account, investors have full control over their assets and can independently select instruments and carry out transactions with high liquidity. The main disadvantage is the high tax burden. All investment income received (i.e. the difference from the sale of securities) is taxed at the full rate of 19.5% (18% personal income tax plus a 1.5% military tax). Investors are also often required to declare this income themselves.

By contrast, joint investment institutions (JIIs) provide professional portfolio management services in return for an annual management fee. Their key advantage is significant tax relief. Profits that remain within the fund and are reinvested are not taxed, which greatly increases the impact of compound interest. Investors only pay tax when they exit the fund or receive dividends, and the dividend tax rate paid by the fund is reduced from 19.5% to 10.5%.

Thus, the most suitable option depends on the investor's strategy. Active, independent investors will find a regular account suitable, while passive investors seeking to minimise taxes on reinvested profits should choose a JII.

How can you make money from investments? The primary ways

Shares: earn from growth and dividends

Shares are one of the most popular investment instruments thanks to their growth potential and regular dividend payments. Essentially, owning a share means buying a stake in a company and becoming its co-owner. If the business develops and profits grow, the market valuation of the company will also increase, as will the value of your stake.

Shares are divided into several categories. For example, ordinary shares give you voting rights and the opportunity to receive dividends, whereas preferred shares offer priority in the distribution of profits. Large-cap shares are characterised by stability. In contrast, shares in fast-growing companies offer high risk with the potential for high returns.

The second component of stock income is dividends. These are the portions of a company's profits that are paid to its shareholders. Dividend-paying companies tend to have stable businesses and predictable cash flows. For many investors, dividends provide a source of passive income.

Bonds: a conservative source of income

The bonds are a popular choice among investors seeking stability and predictability. They work on the principle of debt obligations. Essentially, you lend money to a government, corporation, or municipality in exchange for a certain interest rate.

The main advantage of bonds is the regularity of payments. Each bond has a coupon with the amount that the issuer agrees to pay the investor at regular intervals, typically once or twice a year. Additionally, the bond's face value is returned at maturity, reducing the risk of capital loss.

There are several types of bond: government, corporate, municipal, inflation-linked and high-yield.

The main risks for bondholders are issuer default and inflation, as well as a decline in the market value of bonds when interest rates rise.

Mutual funds and ETFs: simple solutions for beginners

These instruments have become popular among investors seeking market returns without the need for in-depth analysis of individual companies. Their main advantage is the ability to purchase a whole portfolio of assets through a single trade. This reduces risk and simplifies the investment process, which is particularly beneficial for novices.

Mutual funds operate on the principle of joint investment. Investors buy a share, while the management company puts the funds in selected assets, such as stocks, bonds, gold, and other instruments. Management is handled entirely by a professional team, allowing investors to avoid spending time analysing the market. However, it is important to consider management fees, as these can reduce overall returns.

Exchange-traded funds (ETFs) work differently, replicating the structure of a specific index, such as the S&P 500. This enables investors to obtain market returns at minimal cost, as ETFs typically incur low fees. Investors can buy and sell ETFs just like shares, making them a flexible investment.

The main advantage of these solutions is diversification. By buying one unit or share in an ETF, you actually acquire dozens or even hundreds of assets. This significantly reduces risk, as poor performance by a single company has little impact on the overall health of the portfolio.

Currency and precious metals: capital protection

Investments in currency are based on fluctuations in exchange rates. The US dollar, the euro, the Swiss franc and the pound sterling are traditionally considered to be the most stable monetary units. Investors buy foreign money when the national currency shows signs of depreciation. This is mainly done to preserve the value of capital.

Precious metals such as gold, silver, and platinum act as a 'haven'. Gold is the most popular of these, as its value has been supported by institutional investors and central banks for decades. Its price tends to rise during times of crisis when financial markets become unstable. Investment in precious metals can be made in physical form (bullion, coins), through exchange-traded funds, or through special metal accounts.

The main advantage of these assets is that they are not highly correlated with the stock market. This means that, when stocks fall, they can maintain or even increase their value. This is why professional investors include currencies and metals in their portfolios as instruments for hedging risk.

Cryptocurrencies: high volatility and risk

Cryptocurrencies have become one of the most dynamic investment instruments in the modern era, but they are also the riskiest due to their extremely high volatility. The price of this asset can rise or fall by tens of per cent in an hour. Investors, therefore, need to be psychologically stable, understand the market and be willing to accept significant fluctuations in value.

The main reason for the volatility of cryptocurrencies is their speculative nature. Unlike traditional assets, crypto assets are not tied to company profits, economic growth or physical resources. Their price largely depends on demand, market sentiment, news, technological innovations, and regulatory decisions.

Despite the risks, cryptocurrencies offer high income potential. A modern approach to investing in them requires an understanding of the underlying technologies: blockchain, consensus algorithms and real-world use cases.

The key recommendation is to only invest a portion of your capital that you can afford to lose. Venture investors often use cryptocurrencies to test high-risk hypotheses, but they always implement strict risk controls such as cold wallets, stop losses and cybersecurity analysis.

Investing in businesses and startups: generating income through shares

Unlike the stock market, where you buy shares in an established business, here you invest in companies in their infancy. Because of this, the income potential is significantly higher, as the value of a young business can increase by ten or even a hundred times if it is successful.

How does it work? You invest money in exchange for a share in the company. If the startup grows and scales up, its capitalisation increases — as does the value of your share. You can obtain income through the sale of shares (an 'exit') or through dividends if the company becomes profitable. However, the real venture market shows that exits are the main source of income over here.

Investing in such businesses enables you to diversify your portfolio beyond public markets and gain access to innovative solutions before they become mainstream.

The risks are obvious: most startups do not succeed. This is why local investors spread their capital across many projects, thereby increasing the likelihood of a successful exit.

The right strategies for making money from investments

Long-term investing

Long-term investing involves buying assets with the intention of holding them for an extended period — typically between five and 20 years. The key advantage of this strategy is compound interest, whereby your capital grows thanks to reinvested profits.

This approach requires patience and discipline. Over the long term, the market always grows, even if there are periods of decline. Historical data from index markets, real estate and major stock sectors confirms this.

A distinctive feature of a long-term strategy is minimal dependence on market fluctuations. There is no need to follow prices or news daily. The key is to select high-quality assets promptly: promising companies, index funds, real estate or stable-performing technology industries.

The advantages of this approach are lower stress levels and risks compared to short-term strategies. The disadvantage is the lack of quick profits.

Dividend strategy

A dividend strategy involves investing in companies that regularly pay dividends from their profits. This approach is favoured by investors seeking both asset growth and stable passive income.

The basis of this strategy is selecting companies with a proven track record of dividend payments. These companies are typically large corporations in the energy, telecommunications, financial, or consumer markets that have demonstrated stable cash flow for decades. It is crucial to assess a company's ability to sustain these payments over the long term. This is why professionals analyse payout ratios, profit growth, debt levels and business models.

The dividend strategy provides two forms of income: regular payments and gradual growth in share value. Many corporations increase their dividends every year, enabling investors to earn additional income without making further investments. If dividends are reinvested, the effect of compound interest will significantly accelerate capital growth.

The advantages of this strategy are stability and predictability. The disadvantage is that potential returns are lower compared to those of companies with an aggressive growth strategy.

Is trading suitable for beginners?

Trading is an active way of earning money that involves regularly buying and selling assets to make a profit from short-term price fluctuations. Unlike investing, trading requires quick analysis and equally quick reactions. This raises the key question: Is trading suitable for beginners?

The honest answer is that it is only suitable in isolated cases. Trading is a complex process, and the statistics are relentless. Most beginners simply lose money. It requires years of practice, a systematic approach, and risk management, so it is unlikely to be a route to quick profits.

The advantage of trading is the potential for high returns. The disadvantages are the extremely high risks and significant psychological stress involved.

Index investing: Meet the minimal effort

The advantage of index investing is the absence of the need for in-depth analysis of each company. The market itself forms optimal indices, discarding inefficient companies and adding strong ones. As a result, indices have historically shown stable growth, outperforming most active management strategies.

Index funds have low fees, which has a significant effect on long-term returns. Additionally, this is one of the easiest ways to diversify, as you invest in different sectors, countries, and companies simultaneously.

Disadvantages include the lack of high short-term returns and the inability to engage in active trading.

Dollar-cost averaging (DCA)

DCA is an investment strategy involving the regular purchase of the same asset at fixed intervals, regardless of market fluctuations. This approach aims to reduce the impact of market volatility and emotional decision-making.

When the price of an asset rises, fewer units are purchased; when it falls, more units are purchased. This creates an average price, which is often more favourable than purchasing an asset at a specific point in time.

The advantage of DCA is its simplicity. You minimise the risk of losing a significant amount due to an unfavourable entry point. This strategy works well with index funds, large corporate stocks and even cryptocurrencies.

While DCA mitigates fluctuations and balances the portfolio in terms of risk, it is worth noting that the strategy does not guarantee maximum profit. If the market is growing steadily, a large one-time investment could be more rewarding. However, in reality, the market almost always fluctuates, so averaging is a practical tool for most investors.

How much can you earn through investing?

The return depends on the chosen instrument, time horizon and risks. Over the past five years, the market has clearly demonstrated the variety of returns that can be achieved through different approaches.

For example, shares in large technology companies have yielded an average of 12–18% per annum. Some segments, such as artificial intelligence and biotechnology, have shown returns of up to 25–40% in peak years. However, it should be noted that these investments have been accompanied by high volatility.

Indices, particularly the S&P 500, have shown stable returns of 8-12% per annum, making them one of the most predictable investment options. This is why index investing is considered the foundation of a long-term strategy. Moreover, this approach outperforms the results of most active investors.

Over the same period, bonds yielded 4-7% per annum, depending on their rating and currency. They are the most conservative instruments and are suitable for capital preservation.

Gold grew by an average of 6–9% per annum. Its yield tends to increase during global crises.

Cryptocurrencies are the most unpredictable. Over five years, market leaders have shown fluctuations ranging from a 200% increase to a 60% decrease. Returns here depend on entering the market at the right moment and plain luck.

Venture investments in startups offer the highest potential, with returns in the event of a successful exit reaching 5-50x. However, this is a long-term investment with a low probability of success, so experienced investors mainly choose it.

It is important to understand that real returns are generated in the portfolio, rather than in individual transactions. Balancing risks through a combination of different assets can ensure average annual growth of 8-15%.

Can beginners make money from investments?

Yes, but the key conditions are discipline, strategy, and an understanding of risks.

Most mistakes made by beginners arise from having unrealistic expectations. Many want to make quick profits, but the markets don't work that way. Stable income is generated over the long term, not in a week or a month. This is why the best approach for beginners is to invest in index funds and take a long-term view using a dollar-cost averaging strategy.

It is essential for beginners to control their emotions. Panicking and selling during a downturn, as well as buying impulsively during an upturn, are the main causes of losses. Even without in-depth financial knowledge, if an investor acts systematically, the results will gradually improve.

Modern financial instruments make investing more accessible. Brokers offer low commissions, automatic contributions and analytical tools. By adhering to the basic rules of diversification, regular contributions, risk analysis and avoiding emotional decisions, a beginner can reach the level of an experienced investor.

Common mistakes that prevent investments from generating returns

The most common reason for losses is making emotional decisions. When the market falls, investors panic and sell assets at a loss. Conversely, when the market rises, they buy at the peak, afraid of missing out on an opportunity. Investors who act impulsively lose money, whereas a systematic approach yields stable results.

Lack of strategy: Without a clear plan, investors buy individual assets haphazardly without considering how they fit into their overall portfolio. This leads to excessive risk concentration or, conversely, a set of assets that do not complement each other. A strategy determines what to buy, when to buy it, how long to hold it for and what the investment goal is.

Lack of diversification: An inexperienced investor may put all their capital into a single stock, cryptocurrency or industry, thinking it is the most promising option. However, no single instrument can guarantee stable growth. Diversification is a basic risk management principle used by all professionals. A portfolio should include a variety of assets, such as stocks, bonds, indices and defensive assets, as well as a share of high-risk investments if desired.

Ignoring expenses: Brokerage commissions, taxes, and spreads can have a significant impact on overall returns. Experienced investors always take operating expenses into account and optimise them.

Misunderstanding risk: Many beginners expect high returns without realising that these come with higher risks. Getting involved in venture capital, trading, or cryptocurrencies without knowledge or strategy will inevitably lead to losses.

Investments become profitable when investors think systematically, make informed decisions and recognise that financial success is the result of discipline rather than luck.