Investing Basics – Four Things You Must Know

Although most of us use the terms “saving” and “investing” interchangeably, in reality they are two completely different concepts. Remember, you should save; however, you do not have to invest. When you save a portion of your money in a regulated deposit-taking institution, it is insured to a limit. On the other hand, when you invest, you are taking a risk that you could lose your entire principal. Investments offer a higher return for your willingness to take that risk. That is the nature of investments.

1. Your savings, obligations and age matter – a lot! In other words, you should not invest until you have saved and given yourself a comfortable cushion. In the current environment of rising cost of living and job losses, aim for a minimum of 12 months. If you have high expense obligations, then you cannot afford to risk money that you could lose (remember, that is what an investment is). The older you get, the less risk you can afford to take with your funds, because your potential working years are declining as you near retirement age.

2. Only invest in products and services you understand. How many times have people tried to convince you about a “sure thing”, and told you “here’s a hot tip’? It may very well be, but if the person telling you cannot explain the investment and why it’s such a “hot tip” or a “sure thing”, then those are grounds on which you should doubt it. And, it would be prudent to understand what influences the investment – what external factors are likely to make the investment do well or do badly. No one is expecting you to be an expert, but it’s your money, therefore you should be able to evaluate if what the “expert” says make sense.

3. Be conservative and invest with solid reputable institutions. We are living with the certainty of uncertainty. Safe is better than sorry. Therefore, you need to do your due diligence and resist the temptation to be lured by the promise of unusually high returns, when you may have doubts about the strength or soundness of an institution. Remember, regulated institutions are monitored while regulated institutions are not. And, return of principal is just as, if not more important than return on principal.

4. Know Yourself. Believe it or not, this one of the most critical things about investing -knowing your own risk tolerance. You may get a great tip, understanding what the investment entails, understand that it’s an investment (as opposed to savings), and be comfortable with the institution, but the product may just be too risky for you. On the other hand, remember that not all investments carry the same risk, and some may just be right for you, once you have sufficient savings tucked away.

Stocks & Bonds – Invest For The Future

The older we get the more we learn about wise financial management. The saying, “Knowledge comes with age” rings true in this case, since many of us make our most detrimental financial mistakes while we are young. However, it’s never too late to learn ways in which you can make sound financial decisions today that are sure to have you reaping great wealth in the future.

Stocks and bonds are two great options that allow you to make investments now that will put you in a position to benefit from huge returns later.

Stocks
A stock is ownership of a percentage of shares in publicly traded company. By owning stocks in companies, you have the right to vote on important company matters such as selection of the Board of Directors. Additionally, stocks allow you to receive a portion of the profits distributed by the company.

There are two types of stocks:

• Preferred Stock – with these types of stocks, companies usually distribute a percentage of dividends each year based on the profits of the company.

• Common Stock – this is usually held by individuals within the public domain. With this type of stock, owners receive dividends based on the remainder of the profits after the preferred stockholders have been paid theirs.

Investing is technically making your money work for you; that is, investing money to make more money. With stocks, as the value of the company increases so will your investment. Stock shares are bought, sold and traded on stock exchanges.

Stocks are usually available through a stockbroker, who will purchase the stock on your behalf, or through mutual funds, which is an investment company that offers and buys shares at the request of the share holder.

Bonds
Bonds are certificates of debt that are issued by the government or a particular corporation, promising payment of the original amount invested at a fixed interest rate, usually by a specific date. They are therefore loans to the government or a corporation, and bond owners are usually paid for providing this loan to the institution. Bonds are one way the government uses to make money.

Bonds are usually bought and sold using institutions such as bond funds, banks, insurance companies or pension funds. Bonds come with a number of advantages that make them attractive to many persons. It is fairly easy to sell bonds and the rate of interest is usually higher than those associated with stocks. Bondholders also enjoy a certain level of legal protection, since it is the law in many countries that if a company goes bankrupt, the bondholder is entitled to receive some of his/her money back.

Ultimately though, both stocks and bonds are risky investments and while they have the potential to produce significant wealth, the investor can also lose a huge amount of his/her investment.

If you decide to invest in either stocks or bonds, it is important for you to seek advice from professional who will be able to advise you about those assets with the greatest possibility for success and those that may be too risky for your pocket. Equip yourself with information to minimize your chances of making bad financial decisions.