Finance and investments can get a bit intimidating if not understood properly. I myself have been a prey to this. But for the past couple of months I have been investing more time into understanding investments 🙂 , only to find out that I have been missing out on a lot.
There are certain prerequisites with respect to our mindset before we start off.
· Its all about thinking clear, using logic and common sense
· Its involves meticulous planning and discipline
· It should be understood that there are risks involved
· It is a must to keep oneself updated with whats happening around, at least in the economy point of view
· And finally, its not about what others are doing but what’s best for you.
Investing basically means putting your money to work. The money you earn and save after your expenses for a livelihood, need not be kept aside idle. It can be put to work and can earn a profit over itself.
By investing, one is making sure he continues his current standard of living even after retirement. He is ensuring that he is secure at the time of emergencies. Investing is a slow process, which bears tremendous results over a period of time.
Given that there are so many investment avenues, making a choice about where to invest in what amounts, for what period and all depends on the person’s needs or objectives, time, his current situation and personality.
· Needs/ Objectives –General objectives for investments could be to generate current income, safety of capital or retirement planning.
· Personality – Some people are risk averse or conservative investors, they would rather invest to generate less income if it is at the cost of keeping their money safe. Some people are vice versa.
· Timeframe – How much time you have left, for your retirement is a crucial point in decided how to invest. Like, the lesser time you have, the more conservative you should be in planning it out. But if you have just started earning, there is time for making up for losses or investing in avenues that are riskier.
Types of investments <this section is referred from another site>
Grouped under the general category called “fixed-income” securities, the term “bond” is commonly used to refer to any 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 of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed (or “risk-free” in investing parlance). The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.
When you purchase stocks (or “equities” as your advisor might put it), you become a part owner of the business. This entitles you to vote at the shareholder’s meeting and allows you to receive any profits that the company allocates to its owners–these profits are referred to as dividends.
While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren’t guaranteed anything. Many stocks don’t even pay dividends, making you any money only by increasing in value and going up in price–which might not happen.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.
A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which in turn enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, and the list goes on.
The primary advantage of a mutual fund is that you can invest your money without needing the time or the experience in choosing investments. To know more about mutual funds, please visit our learning centre.
Alternative Investments: Options, Futures, FOREX, Gold, Real Estate, Etc.
So, you now know about the two basic securities: equity and debt, better known as stocks and bonds. While many (if not most) investments fall into one of these two categories, there are numerous alternative vehicles, which represent more complicated types of securities and investing strategies.
The good news is you probably don’t need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don’t know what you are doing, you could get yourself into a lot of trouble. We would therefore suggest that you start with simpler investment avenues and leave these investment vehicles for the experts.
Now that we have a basic idea, in my coming posts I discuss about options available under each of these investment vehicles, their pluses and minuses, trends and analyses.