What are the basics of investment?

Highlights

  • A good investment can fetch you higher returns and help in reaching your financial milestone.
  • However, it is important to keep in mind that all investments are exposed to some risk, thus measure your risk tolerance and invest accordingly.
  • Long-term investments are likely to earn higher returns.

An investment is a financial asset that helps you to grow your money. To be more specific, investment is the process of allocating money to acquire financial assets in the hopes that the value of the acquired asset would appreciate in the future and fetch positive returns.

A good investment can help investors earn significant profits, where the money invested has the potential to earn higher returns than the interest you get from your regular savings account. 

A profitable investment can also help in improving your purchasing power against inflation, which is not likely to happen if you stick to the savings account that accrues minimal interest rates. Therefore, it is better to invest in a financial instrument that suits your terms instead of holding idle money in your hand.

But while you are chasing any investment opportunity, it is essential to carefully set out your personal preferences regarding investment goals, investment types, expectations and risk endurance.

Also Reads: Ready to dip your toes into investing? Here are three basic mantras

So, if you are new to the investment world and looking for a head start to ensure your financial well-being, you are at the right place. Let’s get to the basics of investment that will help you in winning this endeavour.

Basics of investment

Types of investments

The global financial market has evolved with the investment challenges faced by investors and traders. There are various trading platforms, in addition to Google, that offers details about all the different kinds of investment options and enables you to pursue the particular venture as per your choice. 

Following are the asset classes that are available in the market.

Types of investments

  • Stock market

Stocks are a commonly preferred investment type. By investing in a publicly traded company’s stock, you become a part-owner of its business, hold the entitlement to vote in shareholders’ meeting and earn part of its earnings as dividend income if they distribute any.

Stock markets around the world generally consist of different types of companies, ranging from sectors such as healthcare, mining, technology, financial services, real estate etc. Thus, investors have a variety of choices.

It is important to note, however, that stock prices fluctuate throughout the trading clock due to various company-related, microeconomic and macroeconomic factors. In order to get profit out of the trade, the investor needs to sell the stock at a price higher than the purchase price, else, they can incur losses.

  • Mutual Funds

Mutual Funds are instruments that club the money from various investors to invest in a specified portfolio of underlying securities, including stocks, bonds, money market assets, etc. The performance of underlying assets altogether impact the overall funds’ performance and return. Thus, investors are generally  advised to research all about the portfolio, including the listed stocks, to predict the returns that the fund can fetch.

Also Reads: Thinking of investing in mutual funds? Here’s how to pick the right fund

  • Exchange-Traded Funds

An exchange-traded fund (ETF) refers to a collection of various investments that tracks an underlying commodity or diverse class of assets/ securities.

ETFs are much like mutual funds except for one crucial aspect that makes it similar to stocks, which is that ETF units can be traded any time during trading hours, allowing investors to benefit from real-time price differentials.

  • Fixed income securities

These are mainly debt instruments or any such type of securities that earns you a fixed sum, including principal plus interest, over a specific time period. It is sometimes considered to be the most trusted and secured investment.

  • Alternative investments

Alternative investment means parking funds in any asset other than securities, such as foreign currencies, hedge funds, commodities, real estate properties etc., which may offer a higher return, but at higher risk.

Risk-averse investors should ideally avoid these kinds of investments.

Factors to keep in mind when investing

  • Return

The whole essence of an investment process is to earn a return on the money invested. Return is the reward that you get on the investment. Investors and stock traders should know how much return they desire from the investment, specifically in the case of growth-oriented securities like stock, mutual funds, ETFs etc. These securities are vulnerable to market conditions, and their prices fluctuate accordingly. 

On the other hand, fixed-income investments generally offer stable returns with less risk. Investors who don’t want to dig deep or expose themselves to market vulnerability but still earn some return over a certain time period often take this pick.

Also Reads: Planning to invest? Keep track of these economic indicators

  • Risk

All the investments are subject to different levels of risk. Investment decisions should be taken only after evaluating your financial capacity to bear the risk attached to the securities.

Investment in foreign currencies, stocks, mutual funds etc., are believed to involve more risks than fixed income instruments.

  • Time 

Time is another critical element of investment. There are long-term investments, like fixed deposits, which can yield a higher return on maturity but demand you to lock in your money for a longer-term. For such reasons, investors are generally advised to assess financial health and longevity to determine the estimated time they can afford to hold the investment.

While time matters, investors should ideally first research the securities, prevailing and forthcoming market conditions to get their best shot at generating positive results out of the investment.

Bottom line

Investment is a multifaceted vehicle that allows investors to earn good returns on their surplus money if carefully invested. And it is best helped when you set your investment objectives, ascertain a return expectation and estimate a risk endurance.

Also Reads: 7 best ways to maximise profit using a diversified portfolio

Comment


Disclaimer