Investment Finance - Getting Back to Basics
The investment industry has been in the spotlight a lot lately. John Q Public has heard an awful lot about how shady stock brokers have almost ruined the economy, and people who were confident in the money they were making from their investments, are now unsure if they'll have anything for retirement. Indeed, playing with investment finance can be a risky venture, but, if you have the capital and the patience, it can also be quite rewarding. The important thing is to have thorough understanding of what investing is and how it works before sending your precious money out into the great unknown.
The first step to responsible investment finance is learning what the different elements are. For instance, do you know the difference between a stock and a bond? A stock is a representation of shared ownership in a company. That's right- if you own stock in a company, even just one share- you are called a shareholder, and have a tiny share of the ownership of that company and are entitled to a share of the profits, called dividends. Sounds great, right? The catch is that the value of a share of stock may increase or decrease, sometimes drastically, depending on how the company is performing, and other economic factors. A bond is another term for a loan made to a company, or in the case of war bonds, the federal government. The entity to which the bond is given is called the issuer, and in return for the bond, the issuer agrees to pay back the loan to the bondholder with interest and within a certain period of time.
Money market instruments are another important element of investment finance. Unlike stocks and bonds, which for various reasons can be quite risky for the parties involved, money market instruments are generally considered to be relatively low-risk investments. Also referred to as cash equivalents, money market instruments are short-term loans or debt obligations made to companies or government agencies for return with interest. A longer repayment period for cash equivalents usually diminishes the amount of return seen by the investor.
Asset allocation, the way that investors divide their money between one or more of the above mentioned investment options, is paramount in successful investment finance. Consult with a financial planner, investment advisor or other wealth management professional to help you construct a solid portfolio that will provide you with consistent returns instead of a rollercoaster ride of making, losing and re-making money.
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