What Is Investing?
Investing, in the context of finances, refers to allocating money towards the purchase of an asset such as real estate or towards a business or project. The main purpose of investing is earning profits or a regular income after a given period. There is a wide range of investment products. They include bonds, mutual funds, stocks, money market funds, annuities, commodities, real estate investment trusts (REITs), Certificates of Deposit (CDs), and hedge funds.
It is important for an investor to note that channelling money towards a given market does not offer the same guarantees as depositing the cash in a bank. In the case of the latter, deposit insurance cushion depositors against any losses. However, the investment products highlighted above are often subject to fluctuations because of market conditions.
As such, the investment may drop in value over a period of time, resulting in loss of the initial money allocated. For this reason, investing has associated risks and it is crucial for an investor to be strategic. It is worth mentioning that regulatory bodies provide trading standards that safeguard the integrity of markets. In a way, these measures protect traders and investors.
Tips for New Investors
The concept of making money in the financial markets is attractive to many. People often use markets to make money that will enable them to educate their children or even buy a home for their family. The prospects of making handsome returns should, however, not blind an investor to making rash decisions.
In this regard, a budding investor (beginner) should first build a cushion by advancing a plan to deal with any potential losses. A cushion is crucial since it will soften the impact should there be a negative change in the individual’s money situation. The new investor should, therefore, plan for an emergency by having a readily available cash reserve where the individual can draw money for living expenses. The recommended period that the cash reserve should last is between three and six months.
Also, the young investor should repay outstanding debt and loans, primarily those that have high-interest rates. The returns from the investments should be greater than the interest rates accompanying the investor’s debt. Moreover, the investor should save between 12% and 15% of their income. This money will go into securing their retirement.
Following the implementation of these protective measures, the investor can allocate the remaining funds into the financial markets.
How Investments Make Money?
The money that an investor earns from the investment made is known as a return. The individual can earn returns through the appreciation of the price of the securities in their portfolio. Alternatively, the returns could take the form of an income such as dividends with regards to stock or interest payment when it comes to bonds.
Market forces influence price movements for the various investments. For instance, bad news such as a report detailing that the company has had a loss or that it may not meet its profit targets results in a drop in stock prices. Conversely, investors who see the prospects of a company earning higher profits or paying greater dividends may push for an increase in the prices. Also, renowned individuals may feel optimistic and consequently buy stock in bulk in anticipation of a buoyant market. Their actions are likely to result in the upward movement of prices.
When it comes to bonds, their prices are also subject to fluctuations. Notably, the payment of the principal only occurs upon maturity. Prior to the maturation period, factors such as an increase in the basal interest rate may impact the prices of the bond. An increase in the interest rates results in a drop in the price of the bonds in order for the investors to receive payments that are commensurate with the prevailing interest rates. Furthermore, the price may also drop if there is a general consensus among traders that the issuer may fail to make interest payments.
Risks of investing money
Returns and risks go hand in hand. They are directly proportional. This statement implies that a high-risk investment is likely to yield high returns. On the other hand, a low-risk investment yields low returns. Low-risk products include Certificates of Deposits. Bonds are riskier than CDs while stocks and equities are riskier than bonds. Investing in commodities is the riskiest endeavor.
Conclusion for investments
Investment products are avenues an investor can use to earn money for other uses. However, they have associated risks. The higher the risk the higher the potential for returns. The inverse is also true. As such, an investor should be cognizant of the possibility of gaining or losing the initial capital. This proclivity necessitates the use of strategies such as saving up for retirement and emergencies and reducing expensive debt.
Investing refers to allocating money towards the purchase of an asset such as real estate or towards a business or project with the main intention of earning returns.
Investing money requires knowledge of the available investment products in the market. Each of these products has an associated risk. Because investing is risky, an investor should be strategic to cushion against the potential for losses. Strategies include having an emergency fund that will cover common expenses for a period of between three and six months, saving for retirement, and lowering the cost of debt.
By purchasing bonds, mutual funds, stocks, money market funds, annuities, commodities, real estate investment trusts (REITs), Certificates of Deposit (CDs), and hedge funds.