How To Invest Your Money
Now that you have decided to invest your money, you need to know more about your investment options. As a new investor, you may not be aware of much more than stocks.
There are actually numerous alternatives for investment available to you. After you learn more about these opportunities, the kinds of investment choices that you make will depend on your own preferences.
This term is used to describe any asset that can be traded. These include things such as stocks but also include bonds, commodities and derivatives. For the purposes of this instruction, the term encompasses just about all of the assets in which you might invest.
A stock is a share in a company. It is literally a piece of the company. If you come to own enough stocks, you do not just own a lot of paper certificates. You could actually take over the direction of the company if you owned more than 50% of the stock.
Ownership, even of the smallest portion of a company, allows you to share in the successes and the failures of that business. When the company performs well, stock values go up. This provides you with an opportunity to sell your shares for a profit.
You may want to hold onto your stocks if they pay dividends. The company which issues the stock will regularly divide a certain percentage of the profits and send proportionate amounts to stockholders. Many people make their living from dividends.
Investing in one stock is not highly recommended. The possible benefits are excellent but there are significant risks as well. The stock could lose a lot of value for reasons out of your control and take a lot of your money with it.
That is why many advisers recommend that you invest in stock index funds. Your contributions to these funds are dispersed among many stocks. Should one stock in the fund suffer a setback, it is just as likely that one or more others will experience offsetting successes and protect your investment.
Bonds are safer investments than stocks. They are safe because they are backed by governments and large corporations that stand little chance of defaulting on their bonds.
The word default is important here because bonds are significantly different than stocks. Whereas a stock is a piece of a business, a bond is a piece of debt. When you buy a federal bond, you lend money to the government.
The amount that you lend is the price of the bond. The yield on the bond is the interest rate that the government will pay you until the bond reaches maturity. At that point, the government returns the principal to you and terminates the lending relationship. The payments are guaranteed.
There is a special interaction between stocks and bonds that even new investors will quickly notice. When times are good and the economy is booming, people put their money in stocks.
They are willing to risk losses on some stocks because they know that their other stock investments will perform well. Consequently, bonds lose their demand. Their yields may go up but they will not offer the same amount of attraction as stocks.
When the market becomes volatile, many people will move their money into bonds. These bonds will not pay well but they are guaranteed by the government and will not lose money. Once the market calms down, it is common to see people move back into stocks.
Some people are uncomfortable buying ambiguous pieces of businesses or abstract government debt. They prefer to put their money into real things. That is what commodities are. Commodities are raw goods that are destined for consumption by industries or individuals.
Just about any raw material of which you can think qualifies as a commodity. Crops, energy sources and metals are all commodities. Gold, which has made a lot of headlines recently, is a famous and highly-desirable commodity.
There are many ways to invest in commodities. Exchange-traded funds are an increasingly popular way to invest in these raw goods.
A gold ETF, for example, would use the pooled resources of investors to buy various gold investments, such as gold coins, bars and even stocks in gold mining companies. Each investor in the ETF is simultaneously invested in all of these underlying assets.
This is a controversial class of investment based most often on commodities. Derivatives, though, are actually quite old. A futures contract is a basic form of derivative. Someone who grows grain might want to secure a price for next year’s crop.
Someone else buys the crop today for a set price. The buyer hopes that the price of grain will subsequently go up. This way he or she will be able to sell it for a profit after harvest.
As you begin to invest, you may want to steer clear of the latter choices. Stick with stocks and bonds.
If you get to the point where you can devote more energy to your investments, it may be worth your while to experiment with commodities and derivatives. The alternatives available in the investment world allow you to choose profitable activities in areas that are convenient for you.