The individual drive behind an investment may vary as it depends on the purpose of the investment. Investment is made with a purpose, and there could be varied purposes behind an investment. Basically, investment is the spending of current money and assets to acquire additional profit or returns in the future.
Though wise investments are profitable, some investments might end up in losses. A guide to financial investment, however, can profoundly increase the probability of success. With good investment choices and decisions, the chance to get good returns certainly increases. Additionally, keeping the money in circulation is more appealing than saving it for years without using it anywhere.
What Are Investments?
Keeping it very simple investment is the action of allocating money and resources to make a profit, have the investment appreciate. Appreciation is actually an increase in the value or worth of money and assets over time. There are four popular choices of investments or asset classes among people.
Technically, these four types can be sub-categorized into two main divisions that are:
1. Growth Investment
The investments in shares and property are considered growth investments. These investment choices are long-term investments. It means that such investment choices generate profit and returns in the future.
Investors could buy shares or a stake in a company. It is a growth investment because, with the growth and progress of a company, the value of the investor’s original investment also grows, but over time. Remember Warren Buffet, an investment guru, purchasing shares has always been his first choice. However, risks are certainly high in this case. Over a period, anything can happen; the prices can go up, but they can also go down.
An investor buys a physical building. It could either be residential or commercial. It is also a growth investment. Yet unlike shares, while there is always a risk in investing, property is considered at least less volatile than shares. This means in each period it is unlikely for the price of property to fluctuate as much as the price of shares.
2. Defensive Investment
It is a comparatively safer strategy for allocating investment choices as the return or profits are consistent with relatively low risks of a market downturn. Cash and Fixed interest securities are defensive investment choices.
It is an investment usually made in the form of money kept in banks saving accounts and term deposits. This particular investment choice has the lowest potential return in comparison to other investment options. However, it is always at hand and can be utilized in case of a rainy day.
Investors actually lend money to a company or government in most cases with a fixed interest rate. This is again a defensive investment choice as the risks are certainly low, but returns are also low and, usually, fixed. Government bonds are considered more safe and secure.
An investor can own assets of one or more choices, and the investment choices that an investor owns are collectively known as an investment portfolio. It is smart to divide investment into different types of investment choices as it lowers the risk and increases the ratio of returns and profits over investment.
Profits or gains coming from the investments made are known as returns. An investor can get the return in different forms, and it is also dependent upon investment choices or asset classes. Let us briefly look at how returns are acquired in different form based on specific investment choice
- Dividend (a proportion of profit shared by a company to its stakeholders). If the investment is made by buying shares of a company, then returns are gained in the form of a dividend. This is of course until one sells one’s position and then gets the return in price appreciation of the stock.
- Rent is another form of return. If an investment is made in property, then the return from it is gained in the form of rent.
- Interest is a form of return that an investor gains. If an investment is made in bonds, then in such a case, the return comes in the form of interest.
- Holding cash gives no return as there is no interest earned.
What Reduces an Investment Return?
Returns vary and are totally dependent on the type of investment made by an investor. Other than that, there is another important factor that significantly reduces the margin of returns that can be gained over the investment.
It is the fees of financial advisors. In case if someone is new and does not know where to invest, then seeking professional advice might help, but again it employs a cost. This cost certainly decreases the margins to return. The simple solution to this problem is to compare costs and look out for the cost-effective best option.
Nothing is absolutely the same when talking about the risks involved in making an investment. You cannot find an investment with zero percent risk. Risk is involved in all investments. In some, it is comparatively low, and in some, it is quite higher. Let us take the example of an investment made in fixed deposits. The risk involved with it is that returns are gained at a fixed interest rate, and it does not go well with inflation.
Also, the value of money declines over time, so it is a loss as compared to the gain it offers. Also, if an investment is made in bonds and shares, it involves the risk of possibly low prices at the time of selling. The solution to it is spreading investment in different investment choices; this reduces risks to a great deal.
When Should You Start Investing?
The answer is completely up to an individual’s mindset. In order to give a rough idea, it is better to invest if you have enough cash to cover for at least six months. Another thing is that you are courageous enough to take the risk involved in investing. The final thing to keep in mind is to set realistic goals. Do not aim to gain a high return rather look for an investing strategy that combines the above-mentioned methods in a way that fits your risk appetite.
Investments are made to gain profits and return. There are different types of investment a person can go for; all have different returns and varied risks involved in it. It is better to take advice from financial advisors, if you are new.