Investments are where people put money into or purchase something with the aim of gaining profit. In essence, they are a means of storing your wealth.
Contrary to popular belief, investing is not just for the well-off – in reality, anybody can invest, as long as they are armed with the right knowledge to do so. Read more to briefly understand the different types of investments, how returns are made, and the risks involved in choosing to invest.
Types of investment
There are many different ways to invest, but the four main types are:
- Shares – in which you can purchase a stake in a business
- Property investments – in which you could invest in physical property, such as a house or commercial building
- Cash – which are the savings a person places in their bank account or building society
- Fixed interest securities – these are also referred to as bonds and are loans you can send to an individual company or the government
There are other, less common investment types too, including; investing in foreign currency, investing in collectibles such as art or antiques, and investing in commodities like gold and oil.
The returns on your investments will be the profits you have earnt, and these can come in several forms, all of which depends upon where you have chosen to invest your money.
Returns can be in dividends from shares, in the form of rent from your property investments, or through interest from your cash deposits. They can also come in the form of capital gains made from the difference in the price you’ve paid for something and price you’ve sold it for.
The amount of risk involved will vary between investments – some are high-risks, while others are relatively low-risk; the only feature they all share is that none are risk-free.
Financial experts typically recommend putting capital into various different investments (referred to as ‘diversifying’), so that risks are spread out which reduces the likelihood of losing a substantial amount on one bad decision, and instead having other investments to fall back on.
Investments are, by their very nature, risky. However, bigger risks tend to mean bigger returns. As such, before starting out, it’s important to set your risk tolerance, which relates to how much risk you are willing to take with your investments. Ask yourself several questions, such as whether you are willing to take big risks, and whether you feel comfortable doing so.
Seeking professional advice is recommended before entering into any financial investment scenario. As such, you can hire a financial adviser to help assess your current situation, while helping you to determine any risks associated with the types of investment you might be considering.
There are also many companies out there who help would-be investors decide where to put their capital and whether an investment is good enough, such as investment fund research companies.
The right time to invest?
Those considering entering into investment situations should only do so once they know they are ready and financially stable enough. As such, you should have enough emergency savings to fall back on if need be, whilst also guaranteeing you have no major outstanding debts to pay off.
Next, set your financial goals in order to understand why you are investing – maybe you want to purchase a new house, or simply save for your children’s futures. Finally, ensure you understand all the risks and set your tolerance level.
Above all, only invest that which you can afford to lose!
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