The Basics of Investments
What is Investing?
- Investing is the act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
- Making your money work for you maximizes your earning potential whether or not you receive a raise, decide to work overtime, or look for a higher-paying job.
- There are many ways you can invest which includes putting money into stocks, bonds, mutual, real estate, or starting your own business.
- It does not matter which method you choose for investing your money, the goal is always to put your money to work so it earns you an additional income.
- Investing is not gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money.
Why Bother Investing?
- People invest because they want to increase their personal freedom, sense of security, and ability to afford the things they want in life.
- For the average person, investing is not so much a helpful tool as the only way they can retire and maintain their present lifestyle.
- In general, the responsibility of planning for retirement is shifting away from the state and towards the individual.
- It is a way to ensure financial stability during your retirement.
Types of Investments:
- Bonds- used to refer to any securities that are founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out. The main attraction is that they are relatively safe, but since they are considered risk-free, there is little potential return.
- Stocks- when you purchase a stock, you become a part owner of the business. Stocks are volatile which means they fluctuate in value on a daily basis, but when you buy stock you are not guaranteed anything. They provide a high potential return but you must assume the risk of losing some or all of your investments.
- Mutual Funds- this is a collection of stocks and bonds. They are set up with a specific strategy in mind and their distinct focus can be nearly anything: Large/small stocks, bonds from the government, bonds from companies, stocks in certain industries or countries, etc. The advantage is you can invest your money without the time or experience that is often needed to choose a sound investment.
- ETF- a type of security that involves a collection of securities, such as stocks, that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies. They are similar to mutual funds; however, they are listed on exchanges and shares trade throughout the day like ordinary stock.
Types of Portfolios:
- Aggressive- people with aggressive portfolios are individuals that shoot for the highest possible return. They have a high risk tolerance which means they can stomach wide fluctuations in value and have a longer time horizon. These portfolios generally have a higher investment in stocks.
- Moderately Aggressive- people with moderately aggressive portfolios are individuals with a longer time horizon and an average risk tolerance. They are seeking to balance the amount of risk and return contained within the fund.
- Conservative- people that have a conservative portfolio are usually individuals that put safety at a high priority. They are risk averse and have a shorter time horizon. The strategy is to maintain the real value of the portfolio, or to protect the value of the portfolio against inflation. Conservative portfolios will generally consist of cash and cash equivalents, or high-quality fixed-income instruments.
- Investing is about making your money work for you.
- Each investor is different in his or her objectives and risk tolerance.
- There isn't just one strategy that can be used to invest successfully.
- Diversifying investments in a portfolio helps to manage risk.