What is an Investment?
There are so many investment strategies, investment options, investment jargon, and investment ideas, that a novice investor can become confused and discouraged before ever getting started. Before an individual can delve into beginner investing strategies, I think it’s important to define what an investment really is and the benefits of investing properly and strategically.
An investment is any vehicle into which funds can be placed with the expectation that it will generate positive income and/or preserve or increase its value. With this definition in mind, it’s important to find the best investment that will generate positive income (or hold its value) and that involves a level of risks you’re comfortable with.
Types of Invesments
There are many investments that an individual can choose to invest funds in. Securities are stocks, bonds, options, futures, and swaps. Stocks represent ownership and can range from very risky stocks (penny stocks) to relatively safe dividend-yield blue chip stocks. Choosing the right stock to invest in can seem like a complicated process, but to simplify it, there is one golden rule that an investor can carry out to get started: “select the investment vehicles that offer the highest return for the level of risk that you’re comfortable with.”
Bonds are publicly traded debt securities whereby companies borrow money from investors and agree to pay a fixed amount of interest periodically and the principal amount at the time of maturity. The attraction to bonds for many investors is that there are considered a “less-risky” investment than stocks. Investors who are risk inverse tend to formulate an investment portfolio that is heavily invested in bonds and other relatively safe assets.
Mutual Funds are very popular investments, especially for the beginner investor. The basics of mutual funds are that investor pool their money together into one fund and that fund invest in a variety of instruments. Mutual funds provide diversification for investors. Diversification is important when it comes to investing. It simply means that you’re not putting all of your eggs in one basket, but investing in different instruments, therefore reducing your risks. Not all mutual funds are alike, so it’s important to research the stocks and bonds the mutual funds are invested in, the historical performance of mutual funds, and the fees that are associated with the funds.
Options are instruments that give an investor the option to buy or sell the underlying investment that the option is attached to at a given price. Generally, options are considered investment tools for savvy investors and are not recommended for beginner investing strategies. However, once an investor gains more investing experience, options are certainly instruments that are worth learning about and possibly implementing into an investment portfolio.
Futures are also not recommended for the novice investor. Futures are legally binding obligations that require the seller of the contract to make delivery and the buyer of the contract will receive the delivery of assets at a given time and date. Futures are generally used for hedging purposes, which is a strategy used to reduce risks.
Another investment besides securities is property investments. This includes real property (buildings and land) and tangible property (gold, antiques, artwork, and other collectibles). Real estate has become popular investments in recent years and the potential for high returns attract many investors. It’s important to become understand the real estate industry before investing in real estate as a flipper, wholesaler, or even in REITs. With that said, real estate is a viable option for the experienced investor who understands real estate and can provide attractive returns. Tangible property investments are highly speculative. These investments are certainly not for the faint at heart. It is important to be very knowledgeable about the asset you want to invest in, and understand that there will be great volatility in these investments.
Things to Remember
So in conclusion, the most important thing to remember is that investments are used to place funds with the expectation of generating positive income and/or to preserve or increase its value. Although the preservation of funds is not as exciting as receiving big returns or investments, it’s important to acknowledge its importance. Maintaining value is certainly better than losing value, so it’s important to choose investments that offer the best possibility to maintain value (relatively safe investments). Remember that in choosing an investment, a good place to start is to select investments that offer the highest return for the risk that you’re comfortable with. Understanding these terms and the available investment instruments is a good place to start for the novice investor. Don’t rush the process, but become as knowledgeable as possible, and you’ll have a greater chance of fulfilling what it means to own an investment – positive returns.