101: INVESTMENTS
Table of Contents
DEFINITION OF AN INVESTMENT
An investment
always concerns the outlay of some resource today i.e., time, effort, money, or
an asset, in hopes of a greater payoff in the future than what was originally
put in. Since
investing is focused toward the potential for future growth or income, there is
always a certain level of risk associated with an investment.
TYPES OF INVESTMENTS
In recent times
people have been convinced that education, motor vehicles and household
appliances are areas where one can invest. These may seem to make sound financial
sense but are not investments ‘in the strict sense’, after going through a few
dozen documents we generally conclude that investments can be classified into 3
types i.e.
1.Ownership-
These investments are the most volatile and profitable class of investment e.g.,
stocks, business, real estate, precious objects and collectibles
2. Lending
Investments- These investments
have generally lower risk and consequently have modest returns
3. Cash
Equivalents- These are investments are "as good as cash," which
means that they can be converted back to cash easily and quickly e.g., Money
Market Funds
It is important to note that these three types of
investments are generally made up of financial instruments (can
be real or virtual documents representing a legal agreement involving any kind
of monetary value). These
instruments come in many forms and types that confer a financial obligation/
right to the owner e.g., stocks, bonds, ETFs etc.
HOW TO INVEST
First and foremost, you should create a financial plan
that answers the question “What are the things you want to invest for?”. You
can use the following steps as a template to formulate your personal financial
plan:
Ⅰ. What are your financial goals- This could be
what you hope to gain from investing e.g., live comfortably after retiring, pay
school fees, have a passive income, improve your lifestyle, meet your bills on
time, reduce your debts, take a vacation etc.
Ⅱ. What is your current financial situation- Sit down and take
an honest look at your entire financial situation. You can never take a journey
without knowing where you’re starting from. Something I find useful is doing a side-by-side
comparison of assets and liabilities/ debts.
Ⅲ. Know your income and expenses- Here you
should consider all activities that bring you income i.e. salary, inheritance,
side hustle etc. In the same breath look at your expenses conclusively and here
you can consider an expense as any obligation you have to meet within the year
e.g. rent, school fees, medical expense and many others.
Ⅳ. Finding money to invest- Once you have a
true picture of your accounts, you should consider how much money you want to
put aside to invest. If the money is not readily available one can either
increase their income or decrease their expenses.
Ⅴ. Know your risk tolerance- Not all investments are successful. Each type
of investment has its own level of risk, so it is prevalent
for you as an individual to know what level of risk you could comfortably.
tolerate
After making your plan
you should consider hiring a financial advisor, some important considerations
on hiring an advisor are:
·
Are
you the type of person who will read as much as possible about potential
investments and ask questions about them? If so, maybe you don’t need investment advice.
·
But
if you’re busy with your job, your children, or other responsibilities, or feel
you don’t know enough about investing on your own, then you may need
professional investment advice.
The advisor should start by asking you about your
financial plan.
Open a brokerage or trading account to enable you to
participate in the financial markets
Choose securities to add to your portfolio that are in
line with your financial plan and lead
you to achieve your financial goals.
TIPS FOR FINANCIAL SUCCESS:
1. Make a
financial plan.
2. Pay off any
high interest debts.
3. Start saving
and investing as soon as you’ve paid off your debts.
INVESTMENT STRATERGIES
Passive and Active Strategies
The passive strategy involves buying and holding
stocks and not frequently dealing in them to avoid higher transaction costs. They
believe they cannot outperform the market due to its volatility; hence passive
strategies tend to be less risky.
On the other
hand, active strategies involve frequent buying and selling. They believe they
can outperform the market and can gain more returns than an average investor
would.
Growth Investing (Short-Term and Long-Term
Investments)
Investors choose the holding period based on the value
they want to create in their portfolio. If investors believe that a company
will grow in the coming years and the intrinsic value of a stock will go up,
they will invest in such companies to build their corpus value.
Value
Investing
Value investing
strategy involves investing in the company by looking at its intrinsic value.
Income
Investing
This type of
strategy focuses on generating cash income from stocks rather than investing in
stocks that only increase the value of your portfolio. There are two types of
cash income which an investor can earn – (1) Dividend and (2) Fixed interest
income from bonds. Investors who are looking for steady income from investments
opt for such a strategy.
Dividend Growth
Investing
In this type of
investment strategy, the investor looks out for companies that consistently
paid a dividend every year. The investors reinvest such dividends and benefit
from compounding over the long term.
Contrarian
Investing
This type of strategy
allows investors to buy stocks of companies at the time of the down market.
This strategy focuses on buying at low and selling at high.
Indexing
This type of
investment strategy allows investors to invest a small portion of stocks in a
market index.
Tips to
succeed
1.
Set
realistic goals
2.
Research
and trend analysis
3.
Portfolio
optimization:
4.
Consult
with a financial advisor
5.
Define
your risk tolerance
6.
Diversify
your risk
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