Investment for Beginners: Probable Questions You Might Want Answer
What is Investment?
To begin with, let us try and define what the term ‘investment’ refers to. An investment is basically an asset, object or item acquired with a goal of generating income, to get benefits or some sort of (usually monetary gain).
Here, we talk about purchasing goods which would not be consumed now but have a huge probability of doing so in the near future. Like a building bought now but which will be sold at higher price in the future.
It usually involves purchasing bonds, stocks, real estate, constructed building or other facility like jewelry, car, etc. Often you can consider the production of goods to produce another good investment as well. There are various forms of investment with a variety of risks, characteristics and benefit. Choose one which seems suitable for your needs, risk taking abilities and benefits in your personal circumstances..
1. Investment Growth
I) Shares or Equity
Shares or Equity considered to be growth investment because they help grow the value of the original investment. When you own a share, you receive a portion of a company’s profit (in layman’s term). It is subject to market risk since, the shares are subject to rise and fall. Shares can change in a second so unless and until you are a long-term investor, it is not suggested. They can easily be considered the riskiest of all types of investment. But yes, they have a tendency of delivering the highest return.
II) Property Investment
Property is considered to be a growth investment because prices of property like house, building, etc. can rise over time (from medium to long term). Just like shares, they, too, are subject to market risk. The prices of certain property can change over time. You can either buy a property or indirectly invest through the property investment fund.
2. Defensive Investment
If you wish to generate income with lower risk than growth, here you go! It is of only one type and that is cash investment!
I) Cash Investment
Cash: These include bank accounts, high interest saving accounts and term deposits. They do carry low return, no chance of capital growth, but they have the potential of delivering regular income and protect wealth, reducing the risk of an investment portfolio.
II) Fixed Investment
Hopefully, as a potential investor, you have heard of fixed interest These include bond. Ring a bell? Bonds are basically government or other company borrowing money from investors with a promise to return it to them with interest. These have lowest return and risk. Although yes, there is still some risk involved as they are not entirely risk free. These can also be sold for cash, quickly.
Certain terms related to investment:
Return: Benefit from any investment is called return. It may consist of gain or loss realized from sale of property, investment, unrealized capital appreciation or depreciation, investment income like dividends, interest, rental income or combination of capital gain and income.
Risk: Financial Risk refers to various types of risk associated with financing, like financial transaction that include company loans in risk of default. It means financial loss and uncertainty about its extent.
Dividend: Payment made by a corporation (company or government) to its shareholders as a distribution of its profits.
Shareholder: Usually an individual but maybe an institution or a corporation who legally own one or more share of stocks in public or private company. Legally, a person can not be a shareholder until and unless their names are registered in the company’s databases.
Retained Earnings: The accumulated net income of the corporation that is retained by it at a particular point of time. At the end, the net income or loss is transferred from the profit and loss account to the retained earnings account. If it negative, it is called accumulated losses, retained losses or accumulated deficit.
Interest: Interest in economics refers to payment from a borrower to a lender of an amount above repayment principal sum.
Fee: The price on pays as remuneration for rights or services.
Bonus shares Share distributed by a company to its shareholder as fully paid shares free of charge. An issue of bonus share is referred to as bonus share issue or just bonus issue. It is based upon the number shares owned by shareholder.
Saving: Income not spent is called saving. It is the act of increasing asset. While savings (with an ‘s’ ending) refers to deposits in savings account.
Free Cash Flow: Measures the cash a company generates which is available to its debt and equity investors after allowing for reinvestment in working capital and capital expenditure.
Asset: Any resource owned by the business. Anything that can be owned or controlled to produce some value and is held by company to produce positive economic value is called an asset.
Capital Accumulation: Dynamic that motivates the pursuit of profit involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return.
Royalty: Payment made by one part to another that owns a particular asset, the licensor or franchisor for the right to ongoing use of asset.
Royalty Interest: The right to collect a stream of future royalty payment.
License agreement: The terms under which a resource of property is licensed by one part to another with or without restrictions.
Things to know before investing:
1. Figure out your goals and risk tolerance either on your own or with someone’s guidance. Know that there’s no guarantee that you will indeed make money. But with an intelligent plan, you should be able to gain at least some amount of financial security
2. Historically, the return of three major asset categories have not moved up and down at the same time. Market conditions that cause one asset category to do well caused another to do average or poor. By investing in more than one category, you reduce the risk of losses.
3. Create and maintain emergency fund.
4. If you owe money on high interest credit cards, pay off the balance as quickly as possible.