If you’ve got extra funds each month, and you’re looking for a sufficient return on that money, you may want to consider investing it. Investing is generally defined as using assets to generate future profits. There are many types of investments, such as purchasing stocks and bonds, providing capital for a friend’s business in exchange for shares of the business or using your money to start your own venture.
If you are a novice at investing, at a minimum, you should understand the following investing basics:
Investing Basic #1
Investments are not guaranteed to generate a profit, and there is the potential that you can lose your money, depending on the type of investment you choose.
Investing Basic #2
Don’t invest money you don’t have. If you haven’t paid your bills, or established an emergency savings fund, it might not be the right time to use your funds to invest. Depending on the investment you choose, your money may be locked into the investment for a period of time or there may be penalties for withdrawing your money or selling too soon.
We’ve created the section below to help you understand some of the more basic types of investments available and where to start your research.
1. Real Estate
Being able to buy your own home is a dream come true for many people. Although you should not look at your home as an investment, some people consider it as such because real estate can appreciate in value over time. If you buy your home at a low market price, live there for some time, your home may appreciate in value to allow you the option of selling it for a profit. However, there is no guarantee that your home value will go up.
Some people also purchase property in order to rent it out. They can generate a profit if the rent is more than the cost of the mortgage and monthly upkeep. Keep in mind that just as prices on homes can increase, the market can also fall. You’ll want to make sure that you can withstand the ups and downs of the real estate market and that you can afford to maintain your real estate investment over the long-term.
2. Stocks
Purchasing stock is a way of owning a piece of a specific company. Companies sell stock to raise money for many reasons like to fund their operations or grow the business. Investing in the stock market has risks and rewards and does not have any guarantees of a return. A company’s share price fluctuates and can go both up and down. Let’s say you purchase 100 shares of a company’s stock at $10. If the company performs extremely poorly or goes out of business, you could lose some or all of your investment. For example, if you decide to sell your 100 shares and the current market price is at $1 each, you just lost $900.
Basically, if you are considering investing in stocks, do a lot of research or seek an experienced and reputable stock broker or financial advisor to help guide your decisions. You need to be willing to accept a certain amount of risk when you invest in stocks.
3. Bonds
When you purchase bonds, you are lending money to an institution, such as a corporation, municipality or federal agency. In exchange for your money, the institution promises to pay you interest during the life of the bond and repays the principal when the bond matures. When considering investing in various bonds, you will want to assess the price, risk, interest rate and maturity. For example, if you are looking for a short-term investment, you shouldn’t purchase a bond that matures in 10 years. Bonds also have risks associated with them and you should research those risks before investing.
As with stocks, there are many different types of bonds available, depending on your investment objectives. If you’re not willing to do the research on your own, you might want to consult a broker who can help you select one. The Security Industry and Financial Markets Association has a good site on bond investing basics if you want to learn more.
4. Small Business
Do you have the next great business idea? Does your friend own a start-up company that is on its way up? You could invest your money in a small business. Investing in small businesses can also carry risks such as the business failing. However, if you are an entrepreneurial spirit who wants a “hands-on” approach with your money, you may be able to assert more control over your investment by becoming involved in running the business. Who knows, your hard work and capital could pay off!