Investing refers to the buying of financial instruments with the aim of making a return on the capital invested. To invest effectively, you need to understand how markets operate. This helps you in predicting the behavior of prices and movements in terms of price trends. It also helps you decide which investments are right for you. Therefore, investment is a key strategy to achieve financial goals.
To invest effectively, the primary thing to be understood is that to make a profit, you must buy assets that have a higher return on investment than what you are paying in fees. Thus, investing in low risk or high yield assets is the best way to make a profit. However, the investor may also opt for investments which have a slightly lower return on investment, but are far safer than those which offer higher returns.
There are three basic investment types which an investor can choose from when investing. These are long term, short term and equity investments. Long term investments include bonds, stocks, and mutual funds. Short term investment types include options, money market funds, CDs and money market accounts. Equity investment types include bonds, shares and common stocks.
There are four types of equity investment types. The first one is through stocks and shares whereby the investor can buy shares at a predetermined price. This means that the shares are purchased in quantities. In this kind of investment method, the returns are guaranteed for as long as the stocks are kept in circulation. However, this is the most risky of all investment methods and is known to be a high risk investment.
Another type of equity investment is through derivatives. Derivatives are financial products that enable investors to trade commodities and currencies. It uses debt investments to provide temporary protection against fluctuations in stock and bond prices. These are considered as high risk investments, especially for those who do not have experience in trading stocks and bonds. Equity derivatives are available in both cash and fixed forms. These may include CD’s and bonds.
Last but not least, the last option is through financial instruments such as futures, options and swaps. These are considered as low risk equity investments and provide opportunities for investors to manage their wealth. They are traded in the same manner as other equity securities but the only difference is the risks involved in them.