Investing 101: What You Need to Know

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Key Points

  • Know your financial assets, options, and the time you can contribute to a business’ growth.
  • Build wisely by investing in assets comparable to your risk level.
  • Keeping your money strong and working hard is the key, don’t let it sit and ‘mature’ in an account which isn’t giving you a noticeable return on your investment..

As life moves forward, more now than ever, people are realising how important it is to make their money work for them. No longer can you get a good job, work 9 to 5, expect to live a comfy life, raise a family in your paid-off home, and retire at 60. You need to work smarter, and your money does too.

Profit and Loss

No matter what investment tool(s) you choose, the end goal is money growth. In order to do this, you need to learn what your choices are, realise how much time you can invest in creating your wealth, and commit on a regular basis. It isn’t rocket science, but you do need to make some decisions.

Learning the language of investment and financial planning is the first step, so here are some key words you’ll need to know.

Assets are the means for investing, such as mutual funds, stocks, bonds, and the like. Asset allocation is a formulation of statistics used to devise a financial portfolio (your personal group of assets) for varied growth, or diversification (having many varied assets).

Modern Portfolio Theory attempts to construct a group of assets that maximise the potential for return at each given level of risk, or chance of profit and loss. It does this by analysing each asset class’ historical return, the variability of that return (variance), and the degree to which the asset classes go up and down in price and at the same time (covariance). The goal is to have a diverse portfolio which will give you less risk and an even gain of profits.

Stocks and Bonds – Lesson One

Stocks represent ownership in a corporation. Each share of stock represents a small but equal share in the company. The stocks you can buy are in public companies, who have registered their stock with the SEC. Privately held corporations also have stock, but it may not be sold to the public.

Bonds are loans that can be bought or sold, usually backed by a government body.  They pay interest back to the investor plus the original investment at a specified time.

The less stable a company is, the more volatile its stock. High grade companies and corporate bonds are more stable and less volatile, or risky. Having multiple assets decreases the overall impact of risk on your portfolio.

Mutual Funds and EFT’s – Diverse and Varied

Asset classes are groups of similar assets that share similar risks. They include things like stocks, bonds, cash, and real estate.

Mutual funds, or Exchange Traded Funds (EFT’s), are collections, or asset classes, that trade as a single security. Think of them as a suitcase full of securities: stocks, bonds, gold, or almost any other legal investment. EFT’s can be actively managed or passively invested. The benefit of a mutual fund is mainly diversification. You can buy shares of one fund and own a tiny amount of many individual stocks or bonds. Quite often they are grouped in levels of risk, but can be assembled in any fashion.

All investors are represented by a broker on the exchange; this is a guarantee that everyone is trustworthy and has the money and reputation to buy or sell stock. The broker governs transactions between the investor and the securities (companies selling stock).

Other Options to Investigate

Many of these EFT’s will contain several different types of asset classes. You are striving to have your EFT give you a high yield and little risk,  whether you have real estate property, stocks and bonds, commodities, or currency.

When you receive your dividends and profits, consider reinvestments. By putting your earned income into a compound interest asset (interest payment on interest) or purchasing your first home (investing to gain equity for long-term gain), you can see investment revenue gains at a faster pace. Again, see what best fits your situation.

Sure and Steady Path

Whichever path you choose, be it to put together your own investment portfolio, use the suggestions of a broker or asset management team, or facilitate a direct avenue of investment, make sure you are aware of exactly how your money is being invested and what type of risk level you have chosen. Over time, your situations will change as well as your financial savvy. The key is be involved.  After all, it comes down to making more money from what you have, and no one is more invested in your success than you!

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