Investing refers to making a financial investment which can be in one form or another. To invest simply means to assign money to somebody with the hope of receiving a return/profit in the near future. Simply put, to invest simply means owning an object or an asset with the primary purpose of creating or the growth of an income from the investment or both; that is, with the aim of producing an income from the investment through the appreciation or a gain in value of that asset over a certain period of time. In most situations, this investment is done by borrowing money from banks and other lending institutions. Some investors use their own funds for investments as well. Whatever your reasons for investing, there are some important things you need to know.
There are two different types of investments that an investor can make on the market: debt-secured and equity-secured. The difference between these two forms of investment is that an equity-secured investment is one in which the borrower is given cash up front whereas a debt-secured investment is one where the buyer or holder of the loan is not given cash up front but has to rely on future returns of the underlying assets to fulfill the loan requirements. It is important for investors to note that the difference does not lie with the manner in which future returns are generated but it is with respect to the risk factor involved. For example, with an equity-secured investment, a borrower is at a greater risk of losing his cash because it is given with a guarantee by a corporate or government agency.
One of the easiest ways of getting started with your own investment ventures is with bonds. A bond is basically a contract between a borrower and a lender whereby the lender promises to pay interest and capital gains on a regular basis. Bond market deals often involve many different types of bonds depending on their market situation and country’s history. These include government bonds, corporate bonds, commercial bonds, mortgage bonds and municipal bonds. The most common and popularly traded bond issues are those from corporate bond funds.
Debt instruments like debt securities, bridge loans, and repossessed assets are great ways of building up your savings. If you are new to the investment arena, then you should opt for long-term bonds which offer higher returns than shorter-term ones. Long-term bonds generally mature for at least 5 years while short-term investments tend to be liquid and earn higher interest rates during the term.
Stocks, on the other hand, are another excellent choice for new investors. Unlike bonds, stocks offer lower returns but come with relatively higher risks. One advantage of investing in stocks is that there is usually a fixed supply and demand, making them a popular choice for initial investors. They also come with relatively higher dividends, though the dividend payment varies from company to company.
In addition to choosing the right kind of investment, you also need to assess your risk tolerance and your ability to acquire and manage your portfolio. You can assess your risk tolerance or willingness to bear risk by calculating your present annual income and future projected incomes according to your financial plans. Your risk tolerance can be influenced by your education and career choices as well as your personality. If you are risk averse, then you should invest in lower risk, low-priced products like treasury bills and bonds. Those who are more aggressive will opt for more expensive and volatile investments like bonds and high-quality stocks.
