Basics of Investing

on . Posted in Basics of Investing

Before you begin to invest you should spend  time reading and understanding the basics of investing.

Investment Types

Cash or “near cash” investments

These are short-term debt instruments, or IOUs, that you can convert to cash, with little or no penalty. Examples of these cash investments are: money market unit trusts, certificates of deposits (CDs), Treasury, bills and BA (Bankers acceptances).

These investments are viewed as safe investments but over time their returns have only slightly exceeded the rate of inflation.

Bonds

Bonds are loans that investors make to corporations and governments. The lenders earn interest and borrowers get the cash they need.

Public sector fixed-interest securities are known as "gilt-edged" securities (or "gilts") when they refer to government stocks, and "semi gilts" when they refer to the stock of the lower ranking public bodies such as municipalities or public enterprises. The rate at which interest is paid and the amount of each payment is fixed at the time the bond is offered for sale.

A bonds coupon rate (interest rate) is competitive which means the rate it pays is comparable to what other bonds being issued at the same time are paying.

The coupon rate is one of the parameters used to determine the consideration (price) paid for the bond. Interest rates have a direct impact on the price paid for bonds. The value of a bond often increases as interest rates drop and decrease in value when they increase.

Shares

A company share is normally defined as any number of equal indivisible rights or interests in the management, profit and ultimate assets of a company constituting the property of those who own it and being evidenced by a certificateShares are sometimes referred to as equities - hence the equity market as opposed to the fixed-interest market.

If the Company prospers, you as the investor will share in its profits and benefit from any rise in the market value of its stock. Conversely, if the company runs into problems the value of your stock will drop.

Shares are considered more risky than bonds or cash.

If you are investing for the long term, you ought to invest in shares as shares have historically outperformed other investments.

Risk and Reward

"What is the chance I'll lose my money?" The key element in any investment strategy is the tradeoff  between risk and return.

We must decide for ourselves how we want to balance goal risk and investment risk.

To decide how much risk to take in your investment you must be familiar with the following types of risks…

  • Principal risk - this refers to the possibility of losing your initial investment (i.e. the money you invested). Usually, investments with a higher degree of principal risk have a potential to yield greater returns over time than investments with a lower principal risk.
  • Inflation risk - The possibility that increases in the cost of living will reduce or eliminate an investment real return.
  • Fluctuation risk - is related to principal risk, but refers to how much the price of an investment may move up or down.
  • Country risk - The possibility that political events such as war, financial problems or natural disasters will weaken the country's economy and cause the investments to decline.
  • Currency risk - The investment may be priced in a currency which may devalue or appreciate this is also called exchange-risk.
  • Industry risk - The possibility that a group of shares in a single industry (e.g. mining) will decline in price.
  • Interest rate risk - The possibility that bonds will decline in value because of an increase in interest rates, the opposite would be beneficial to the investor.
  • Manager risk- The possibility that the investment company or investment manager does not execute the funds’ investment strategy and as a result the investment suffers a loss.One way to keep the various types of risk in balance, and achieve your return goals, is to spread your assets among various investment classes. This strategy is called asset allocation and investments should be spread among various investment classes to reduce the risk.

    How to reduce risk

    • Start young - If you start to save from a young age you will have more time for your money to grow and it will be more affordable.  Once time is spent you can’t get it back!
    • Invest for the long term - If you invest in shares your investment risk decreases over time. The long-term returns will more than compensate you for the risk taken.
    • Diversify - Asset allocation is one of the most important factors to reduce risk.
    • Returns - Don't expect excessive returns from the stock market  rather achieve outperformance on  inflation by two or three percent

    If  you are unsure or  need a caring and helping hand my team and I are more than willing to introduce you to investing in a manner that will meet with your comfort zone and at a level that you will understand. Give us a call you will be surprised at what wealth we are able to help you create for yourself.