Investment is a term that is familiar to many of us, but most people perceive it as something complex and mysterious. This is also evidenced by official statistics, according to which only about 2% of the Russian population invest their savings in the stock and bond markets, currency and money markets.

Tens of millions of our compatriots open deposit accounts in banks. Of course, deposit accounts can also be called investments: deposit accounts are considered to be absolutely risk-free investments, and return on investment is rarely much higher than inflation.

On February 7, 2020, at its first meeting in 2020, the key interest rate was lowered by the Central Bank of the Russian Federation for the sixth time in a row and amounted to 6%. The REPO auction minimum interest rate of the Bank of Russia for a period of one week or the maximum interest rate at deposit auctions of the Bank of Russia for a period of one week are set equal to this key rate.

To paraphrase it in simple terms, this is the interest rate at which the Central Bank is ready to extend funds to commercial banks. If a commercial bank can easily take out a loan fr om the Central Bank at 6%, then it will be ready to get funds from individuals at a more favourable percentage only. This is due to the fact that collection of funds from individuals requires maintenance of a large number of employees to process applications for maintaining deposit accounts. Therefore, the interest rate offered by the majority of banks rarely exceeds 4-5% on deposits with a duration up to 12 months.

As a result, our compatriots start investing in alternative tools that can generate a greater income. And these investment opportunities are really vast and to the taste of everyone. These may be shares and bonds of companies from different countries, mutual funds, personal investment accounts, and investments in foreign currencies.

However, please keep in mind that the main difference from a bank deposit is the existence of a risk. It always has a direct relationship with profitability: the higher the risk, the more you can earn or lose. The most spectacular example of this is bitcoin. One day, this currency can grow by a couple of thousand dollars, and the next day – fall by the same amount, and sometimes even by a larger sum.

The most important thing I intended to communicate is: never invest in tools that you are not very well versed in, even if they seem very simple to you. A striking example that immediately springs to mind is a novice private trader from Kazan. This man has not just reset his brokerage account to zero for 1 day (almost 5.6 million rubles), but also owed 9.5 million rubles to his broker, while playing with the RUB/USD currency pair. This is a very instructive story about an individual with no professional educational background who started thinking that he saw earning potential which even highly-experienced traders with the best PCs and systems were not able to recognize. However, life is not a fairy tale.

I highly recommend reading the article covering this story “Without a lim it”: how a private trader reached a turnover of RUB 42 bln by buying and selling foreign currencies on the foreign exchange”. In the next article I’m going to elaborate on this case and tell you how to avoid such a situation.