An Introduction To Investing
An investment is anything you spend money on with the hope or expectation of getting more money back in return.
The most popular investments belong to four different categories, which experts call “asset classes.” These are:
* Shares: Buying an ownership stake in a publicly-traded company.
* Cash: Savings put into a bank, savings and loan, or other financial institution.
* Property: Buying a physical building, either commercial or residential. (Property investment can also include buying land without buildings on it.)
* Fixed-interest securities (also known as bonds): Loaning your money to a company or government.
Besides these classes, there are other forms of investment as well. These include:
* Foreign currency
* Collectibles, e.g. antiques or art
* Commodities, e.g. oil, gold, coffee, corn, rubber, etc.
All of the assets owned by a single investor form a unit known as a portfolio.
It’s generally wise to spread your money across multiple asset classes. This reduces the risk of your portfolio as a whole performing worse than expected. (This will be discussed in greater depth later.)
Cash is a unique asset class because you can withdraw your money whenever you want to. A cash account is generally counted as a secure investment. Cash is ideal for preserving the value of your money. If you want to grow that money and earn a profit with it, you need to look at the other asset classes: securities, shares, and property. The value of these assets go up and down, but you should pick them with an eye toward their long-term growth.
The profit your investments earn is what is known as returns.
The form that returns take will vary based on the type of investments you purchase. Common forms of return include:
* Dividends (paid from shares)
* Rent (paid by properties)
* Interest (paid by cash accounts and fixed-interest securities)
* Capital gains (the profit you earn when you sell an asset for more than you paid for it)
Why Investment Returns Are Reduced By Fees
Most investors rely on professionals to manage their assets to some degree. This process requires time and expertise, and the professionals are paid for their work in the form of fees. Fees come out of your returns, reducing the amount you receive. You should always have a clear understanding of the fee arrangements you are agreeing to before you make an investment.
To learn more, you can check our popular investments guide for a basic description of fees. The link below will give a more comprehensive overview of investment fees:
Understanding Investment Fees – read our guide
Gambling with your savings is not an attractive idea, but the truth of the matter is that there is no such thing as a risk-free investment.
Every investment involves some risk of loss. The amount of risk varies depending on the type of investment you make.
When you put money into a savings account (cash investment), you risk losing some of its value (buying power) in the long term.
This risk is caused by the relationship between the interest paid by the account and the pace of inflation. If inflation rises above the interest rate, the value of your cash goes down.
Even the best investments which are index-linked to keep up with inflation don’t always match market interest rates. While these assets protect you from losses caused by inflation, they may earn less interest than you expect.
Investing in shares will generally outperform interest-bearing accounts and beat inflation. Here the risk is that the price of your assets might be lower than you want them to be when you need to sell them.
Low asset prices may make the return on your investment poor or even lose you money. This is why you need stock alerts to keep on top of them.
The fact that every investment offers different sorts of risk is why it’s a good idea to put your money into different asset classes and products.
This protects by limiting the amount of your money exposed to each different risk. If one investment fails you, you have others to fall back on.
This process is known as “diversifying.” Learn more from the guide presented here.