Investment explained
An investment is a gamble: instead of the security of guaranteed returns, you're taking a risk with your money.
You can invest in Shares, Bonds, Funds, Government bonds (gilts), UK property market or even Farmland, Vintage cars, Wine, Fledgling technology, firms or art.
For most, investing means putting money in the stock market.
MORE IDEAS FROM THE ARTICLE
- A stock market is simply a place where buyers and sellers meet to sell shares.
- A share is a divided-up unit of the value of a company.
- Shares exist to boost profits of firms to turn a business into a financial success.
- Enter a stock market: in return for your cash, a business offers you a share in its future – so you essentially own a tiny slice of that company and become a 'shareholder'.
- This slice of the company you own can then be traded with anyone who wants to buy it.
- The price is initially set by the firm offering shares.
- Its price on any given day can be determined by poor financial results, the economic health and so-called 'sentiment', ie, if City buyers think a firm will struggle, its price can fall.
- Shares are listed on an 'index'.
- The greater return you want, the more risk you'll usually have to accept.
- Diversify as much as you can to lower your risk exposure, ie, invest in different companies, industries and regions.
- If you're saving over the short term, it's wise not to take too much of a risk. It's recommended you invest for at least five years.
- Review your portfolio. A share might be a dud or you might not be willing to take as many risks as you did before.
- Don't panic. Investments can go down as well as up. Don't be tempted to sell or buy shares just because everyone else is.
- Ask yourself WHY you're looking to invest.
- It is better to try and sort out your personal debts first before you take the risk of making them worse.
- You don't need a load of cash to be able to invest in the stock market. You can 'drip-feed' in small sums on a regular basis.
- As a rule of thumb, you should never invest more than you can afford to lose.
- You can buy shares or funds from different providers.
- The cheapest offers you'll want to do it through is a website, often called a platform.
- It's a two-stage process. First you need to pick which platform to buy your shares or funds from, then you need to decide what investments to buy.
- As a rule, you'll be charged for using the platform and buying the investment.
One is when the shares increase in value (and you profit when you sell), the other is when they pay dividends.
Dividends are a bit like interest on a savings account. If a company makes a profit, it gives some of it back to you.
- A fund is simply another way to buy shares.
- Instead of you buying a slice of a company directly, you give your cash to a specialist manager who pools it with money from other investors (like you) to go and buy a job lot of shares in a stock market.
- Each fund is made up of 'units', so if you want to invest you'll need to buy units.
The value of each unit will rise or fall depending on demand in the market for the fund.
Funds can invest in almost anything – countries, energy, gold, oil, even debt.
All funds have a theme – anything from geography (European, Japanese, emerging markets), industry (green companies, utility firms, industrial businesses), types of investment (shares, corporate bonds, gilts), to the size of the company.
An FTSE 100 tracker fund invests in the UK's 100 biggest companies and therefore is much more mainstream.
RELATED IDEAS
- It means investing in common stock, which is another way to describe business ownership or business equity.
- When you own equity (the value of the shares issued by a company) in a business, you are entitled to a share of the profit or losses generated by that company's operating activity.
- Equities are the most rewarding asset class for investors seeking to build wealth over time without using large amounts of leverage.
- Productivity Growth: Equivalent to technology getting better, faster and us constantly learning from our mistakes. We will always be able to do more with less time and resources than we were able to in the past.
- The Short-Term Debt Cycle is defined by a growth period and then a recession period. These cycles last about 5 – 8 years and peaks when loans become more expensive.
- Long-Term Debt Cycle is similar to the short-term debt cycle and takes typically 50 years to play out. It peaks when the economy is saturated with debt and it literally can not take on any more.
Many companies use the insights of financial managers and external consultants to manage their risk. A one-size-fits-all solution is not yet in existence when it comes to risk management.
These companies usually use derivatives like forwards, options, swaps and futures to offset their risk, but without a clear set of risk-management goals, the use of derivatives can increase the risk substantially.