It is always good to have at least a basic foundation for basic investment knowledge, whether you are a beginner in investing or working with a professional financial advisor. The reason is simple: you are probably more comfortable investing your money if you understand the jargon and basic principles of investment. By combining the basics with what you want to get out of your investment strategy, you will be able to make more confident financial decisions and be more engaged and interactive with your financial advisor.
Below are some basic principles that you should understand and apply when potentially investing your money or evaluating an investment opportunity. You will find that the most important investment issues are very logical and require only common sense. The first step is to make the decision to start investing. If you’ve never invested your money before, you probably don’t feel comfortable making investment decisions or moving in the market because you have little or no experience. It is always difficult to find a start. Even if you find a trusted financial advisor, it is still worth your time to train yourself so that you can participate in the investment process and ask good questions. The more you understand the reasons for the advice, the more comfortable you will be in the direction you choose.
Don’t let the financial world intimidate you.
When you turn on a financial services provider’s television, don’t worry that you can’t immediately understand the financial professionals. Much of what they say can actually be reduced to simple financial concepts. Make sure you ask your financial advisor the questions that concern you to make you feel more comfortable investing.
IRAs are containers designed to hold investments – they are not investments themselves.
The first area of confusion that most new investors get confused about is around their retirement vehicles and plans they may have. If an investor has an individual retirement account (IRA), a 401(k) plan of work or another pension plan at work, you should understand the differences between all the accounts you have and the actual investments you have in those accounts. Your IRA or 401(k) is just a container that houses your investments and thus brings some tax benefits.
Understanding stocks and bonds
Almost every portfolio contains this type of asset class. When you buy a stock of a company, you buy a share of the company’s profits. You become a shareholder and owner of the company at the same time. This simply means that you have equity in the company and in the future of the company – ready to go up and down with the ups and downs of the company. If the company is doing well, then your shares will perform well and increase in value. If the company isn’t doing well or fails, you may lose value.
When you buy bonds, you become the creditor of the company. You simply lend money to the company. So you do not become a shareholder or owner of the company/bond issuer. If the company fails, then you will lose the amount of your loan to the company. The risk of losing your investment to the bondholder, however, is less than the risk for owner/shareholders. The reason for this is that in order to stay in business and have access to finance to finance future expansion or growth, the company must have a good credit rating. In addition, the law protects the bondholders of a company from its shareholders if the company goes bankrupt.
Shares are considered equity investments because they give the investor a stake in the company, while bonds are referred to as fixed income investments or debt securities. For example, an investment fund can invest in any number or combination of stocks and bonds.
Do not put all your eggs in one basket.
An important investment principle of all is not to invest all or most of your money in one investment.
Include several and different types of investments in your portfolio. There are many asset classes like stocks, bonds, precious metals, commodities, art, real estate and so on. Cash is in fact also an asset class. These include foreign exchange, cash alternatives and money market instruments.