5 Types Of Investments And How They Work
Since I write a lot about personal finance, I frequently get questions about investment advice. My advice – to the extent that I even give it – is very guarded, and always followed with seriously generous disclaimers. The two most frequent questions I get from readers are “what do you invest in” and “what should I invest in?”
The truth is, I have no idea specifically how anyone should invest their money. The reason it is because I’m not a investment professional. I had to learn by trial and error. And I’m still learning because every day there is new information about the markets. And to be honest, even experts don’t have this figured out yet.
Investment is a big broad world with lots of methods for different kinds of women. You probably need to invest if you want to have a comfortable financial life today and in the future, especially during retirement. But contrary to what you might hear from investment advisers on TV and radio, there are more than one or two “right” ways to invest. In the real world, there are hundreds of ways to invest, each appealing to a different kind of person.
A large number of women look to investing as a means to supplement their income or increase their wealth. The markets seem to offer dazzling opportunities for profit, and although the risks are undeniable, those who can stomach the risk are often drawn in. Investing is when you buy a position and hold it either for one week, one month, one year or ten years. You are investing in the company to bring you back gains and profits. You are in it for the long haul.
In investing it is wise to have diversification and you may do maintenance of your portfolio either monthly, bi yearly or yearly. In order to decide where best to invest your money, you need the knowledge to assess which investment vehicles will be most capable of helping you to achieve your goals.
So let’s look at the most popular instruments to grow your wealth:
The term ‘bond’ refers to a security that is founded on a debt. Bonds allow a company or government to borrow your money to fund a project or refinance other debt. Bonds are considered fixed-income investments and typically make regular interest payments to investors. The principal is then returned on a set maturity date.
Stocks are the most well-known investment instruments, and most people are familiar with how they work: you purchase them, and in doing so, you become the part owner of a business. They are far more volatile. It is common for them to fluctuate daily, and when you purchase them, there is no guarantee that you will profit from your investment. The upside to this is the potential for profits. Stocks are not limited in how much they will give back to you. It is possible to increase your wealth by a marked degree if all goes to plan and your assets thrive.
3: Mutual Funds
They are a collection of stocks and bonds, purchased by a number of investors to buy a basket of investments that align with the fund’s stated goal. They have teams of managers who choose companies for the fund to invest in, based on the fund type. One important note, when investing in mutual funds you are basically forced into the buy and hold mold. Most of the funds have time frames anywhere between three to five years. If you want to sell your shares of the fund beforehand, you will have to pay a fine.
The foreign exchange market, known as Forex for short, is when you buy and sell foreign currencies to try to make a profit. Anytime you buy a foreign product, or do business with a company that operates outside of Canada, the transaction relies on foreign exchange to convert the currencies. Foreign exchange trading is risky. Trading in international currencies requires a huge amount of knowledge, research and monitoring. Known to be an exciting venture, it lures traders over and over again, and can deliver staggering profits for those bold enough to use leverage. Yet it is not a game for the faint of heart. The potential for wealth goes hand-in-hand with the danger of losses, and a great deal of skill and experience is required to take advantage of the former and avoid the latter.
5: Real estate
Investing in property has long been the dream for many of us – it’s something known, tangible and continues to be a proven way to make money. Investment is a slow burn. It’s mostly a longer-term way to slowly build wealth and add to retirement savings. A quicker way to build wealth may be through property development by buying a house, renovating to add value and selling for profit. Once sold of course, this does not provide consistent long-term income. Done right, property development will give owners a lump-sum profit. Another way to buy into the property market is to invest in Real Estate Investment Trust (REITs), which are like mutual funds for real estate, or through online real estate investing platforms which pool investor money.
Here are some key terms associated with your investments:
Assets: An owned resource expected to increase in value.
Holdings: The specific assets in your investment portfolio.
Portfolio: Your “portfolio” refers to all of your investments, as a group. Diversifying your portfolio means investing in a variety of assets.
Asset classes: A group of assets with similar characteristics. Generally, stocks, bonds and cash.
What I want to make clear to you is that the stock market is always going to experience market volatility. Sometimes it is relatively mild and may even go unnoticed by you and the media. Other times, it is a spine-tingling roller coaster drop that leaves everyone feeling shaky and fearful.
It’s your money, and you should always understand what you’re investing in. Don’t copy anyone’s plan simply because that’s what got them success. Work with a financial consultant to compare all your options before choosing your investments.
Contact us today to speak to one of our Financial Advisers for a free consultation. +27 14 594 2388