Investing is one of the ways which lets individuals grow their wealth. However, those who are not well-accustomed to the fundamentals of investing may feel as though investing is only for high-net-worth or financially savvy individuals. This may not be true as investing is not just limited to a certain group of individuals.
So, what is an investment? Investment means setting aside a portion of your money into an investment product with the aim to earn potential returns. You can choose a product as per your investment objectives and risk appetite.
Before you start your investment journey and look for answers to questions such as how to start investing or how much to invest, it is important to know what kind of an investor you are.
One of the ways to assess this question is to identify your risk appetite by asking yourself the following questions:
- Do I want to invest in highly volatile products that may yield relatively higher returns? or
- Do I want to invest in low volatile products that may yield relatively lower returns?
The performance of highly volatile investment products, such as equities, rely on market trends. If the market is in an upward trend, these products may generate potential high returns and vice versa. Low volatile products, such as high credit quality bonds, are less impacted by market trends on a relative basis.
Market volatility impacts performance and may positively or negatively affect your Return on Investment (ROI) as well as your initial investments. Once you identify your risk appetite and investment objectives, you can select the types of products that you may wish to invest in. Investing in a product that aligns with your financial needs may help you grow your wealth.
Though assessing your risk appetite is not the only factor in identifying the types of investments you want to put your money in, it is one of the major factors that can help you create a well-balanced and diversified investment portfolio.
Here are some of the common types of investments:
Equity investing involves the buying and selling of stocks of a publicly listed company in a stock exchange.
Fixed income investing means investing in debt securities over a fixed period to earn coupon payments. At maturity, investors receive the principal investment if there is no default. The most common types of fixed income products are corporate and government bonds.
An investment fund allows a group of investors who share a common financial goal to pool their money together and invest in a portfolio of financial instruments.
The investment fund has a fund manager who is responsible for investing the gathered money into specific securities (equities, bonds and money market instruments) to meet the predefined investment objective. When investors put money in an investment fund, it means they are buying units of the fund. As a result, they become the unit-holders of that fund.
Alternative investments do not fall under the realm of traditional investments such as bonds, equities, etc. Investors opting for alternative investments can put their money in hedge funds, real estate, commodities, antiques, etc.
Read below to know some of the common investment strategies:
Growth investors invest in stocks of companies that are young or small but display immense potential to expand their earnings in the future and grow at an above-average rate compared to their industry counterparts. This strategy is attractive to several investors as purchasing stocks in promising companies may potentially deliver high returns.
Investors who adopt this strategy select stocks that they believe are being traded at a lower price than their book value and are being undervalued by the market. They take advantage of the opportunities that occur due to the market overreacting to good or bad news. This overreaction can affect the movement of the stock prices and offer attractive valuations. Value investors buy stocks at a discount and sell them when their prices go up.
Buy and hold is a passive investment strategy wherein the investors buy securities and hold on to them across a longer time horizon to create a stable portfolio. Investors who use this strategy believe that long-term returns outweigh short-term market fluctuations. Buy and hold investors are also not active participants in trading.
In an active trading strategy, investors buy and sell stocks to make a quick profit from short-term price movements of stocks. This strategy involves holding on to the trades for only a short duration. Active traders usually trade in stocks, foreign currencies, etc., as they can easily get in and out of positions. Day traders* and swing traders** are considered active traders.
*Day Traders: Those who make several trades during the day.
**Swing Traders: Those who hold a tradable asset for a few days to profit from price change or swings.
Risks and return opportunities are the fundamentals of investing. Investment products that may yield potentially higher returns can be volatile and may have a higher risk. Similarly, investment products that may generate lower potential returns may have lower risks and offer more security. As both are correlated to each other, investors must identify their risk appetite and investment objectives before investing.
Some guidelines for investing are:
- Identify your investment objectives
- Identify your risk appetite
- Diversify your portfolio
- Start early
- Consider different investment options
- Identify your investment time horizon
A good investment strategy is one that aligns your risk appetite with your investment and financial needs and objectives.
There is no rule of thumb on how much you should invest for the first time. However, it depends on your risk appetite and the amount of money you wish to set aside. It also depends on your financial situation, investment objectives and your investment time horizon.
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