Investing means spending a lot of money and time on assets to generate profits. Investments generate income through immediate gains or by accumulating earnings over time.
Classification of Investments
1. Ownership investments are investments in which a person spends money on personal assets that generate profits, such as stock trading, real estate, precious metals, etc.
2. Lending investments involve individuals buying debt that is to be repaid in the future at a fixed interest rate. Credit investments are low-risk and generate relatively small profits. Examples are bonds and savings accounts.
3. Cash equivalents are investments that are easily converted into cash. Examples include money market funds, where investors leave the money behind to earn high interest rates for a certain period.
Types of investment
· Shares – these are securities that companies sell to individuals, and they give members ownership of the company. Shareholders earn dividends or losses in rare cases.
· Bonds – that is debt that countries or companies sell to shareholders to raise capital. Bonds earn a fixed interest rate after a particular time.
· Commodities are raw materials or primary products. Commodities are hard or soft. Hard Commodities are natural resources that are extracted, while soft commodities are agricultural products and livestock. Commodities are risky to invest in and are suitable for seasonal investors.
· Residential and commercial real estate essentially purchases land and commercial real estate construction either for business or residential purposes. Investors can indirectly invest in real estate by buying Real Investment Trust shares REIT.
· Exchange-Traded Funds ETFs) are an investment that bundles investor funds intending to invest in another asset. ETFs have underlying assets and are usually traded in arbitrage to maintain the net value of the underlying asset.
· Investment trusts are investments that sell shares to individuals to pool funds and invest in a single investment that buys many assets. It has high returns. Examples are Real Investment Trust Shares REIT.
· Options and Derivatives. Options give investors the right to sell a security within a set period. Derivatives are agreements that draw value from underlying assets and are usually used in speculative trading.
Reasons why people invest
· To increase their monetary value: Many people invest in improving their finances in the future. Real estate, mutual funds, commodities, and stocks are among the best investments for monetary growth.
· People invest, reserving money, and the methods used to secure money include deposit accounts, government bonds, and savings accounts.
· Investing in Unit Linked Insurance Plans ULIPS, Public Provident Funds PPF, Equity Linked Savings Schemes ELSS reduces your taxable income and gives you tax relief.
· People are also investing to save for retirement.
· Investments are necessary to generate constant time.
· People are investing to achieve their financial goals.
· Investment is a source of additional revenue.
The best time to invest
Getting started early gives investors the chance to experiment with different investments and see which works best for them. Early investing has the added advantage that an investor can start investing at any time as long as they have money to invest. When using savings, the right time to invest is when you have a residual amount that can cover you for the next six months from the time you start investing.
Factors to consider before Investing
· Understand your financial needs. It is crucial what investments you make.
· How to diversify your investments: This is essentially learning how to spread your money across different assets to balance risk and reward.
· Determine the period you want to take before your investment brings money.
· Watch market forces closely to see if you will make a profit.
Methods of investment
Investment methods are classified either as growth and value methods or as active and passive methods.
Disadvantages of investing
· There is a certain amount of risk in investing.
· It can be tiring for the mind
· Investors face plenty of competition
· Investments require technical knowledge to be easy to navigate.