We have recently been looking at the importance of developing your financial savvy. Ignorance about money matters can cause you to struggle to meet your current financial needs, and may also prevent you from making the best use of your funds to build your wealth.
Investing – the process of putting money to productive use with the expectation of making a profit – is a vital money skill for anyone who wishes to accomplish more out of life than just paying bills. If you don’t know how to invest, it will be difficult for you to earn enough money to live your dream lifestyle.
If you try to invest without understanding the process, you may also make poor investment choices. Investing in ignorance can be detrimental to your finances; you may overlook lucrative opportunities or lose your money. Let’s look at four things that you need to consider before you start investing.
How do different investments work?
Investing is a lot more involved than just saving. When you invest, you are putting your funds into a project or outlet that should be geared towards giving you a positive return on your money. To be a good investor, you must not be laid-back; you need to know exactly how investments operate.
With money market instruments or bonds, you can lend money to governments or large corporate entities. Investments such as stocks allow you to buy part-ownership in companies with publicly listed shares. Other investing options allow you to speculate on the prices of certain products.
Since the investment horizon is vast, you should approach learning this topic as if you were in school or developing skills for a new job. The Internet is a good source to expand your knowledge; you can also read books and speak with an investment advisor to gain more information.
What is your purpose for investing?
Once you have a fair understanding about different investing options, you need to consider what you hope to achieve by investing your funds. What are some of the money goals that you would like to accomplish from the proceeds of your investments?
It’s important to match your goals with appropriate investments that can help you to attain your objectives. For example, if you wish to receive your investing profit on a regular basis, then you need to look at investing in bonds or money market instruments that can supply an income stream.
Other considerations you should make include: What time frame can you leave your funds on an investment? How much money do you want to gain on your funds? How quickly do you need to be able to cash in your funds? These questions will help you to select suitable investments.
How do you earn from an investment?
There are various ways in which investments can supply you with profit. Options in which you lend money, such as money market instruments, provide an agreed interest amount to be paid on set dates. You may also be able to sell your bonds to make gains on your original buying price.
With stock investments, you can receive income in the form of dividends whenever the company makes some of its profit available to shareholders. You can also sell your shares to other investors via stock exchanges, for a higher price than you paid for them.
Investments which involve purchasing commodities such as oil and gold, or trading in foreign exchange, allow you to profit from buying at a low price and selling at a higher price. To succeed, you need to have significant knowledge about the financial markets which offer these options.
How can you lose from an investment?
Although investing gives you great opportunities to make money, you should be aware that all investments come with some amount of risk. Risk is the possibility that you could lose some or all of your money, have a delay in getting back your funds, or not achieve your desired profit level.
With lending money, there is some risk that the borrower may not be able to pay you back, so you need to determine the creditworthiness of the investment. With stocks, there are no guarantees of a company’s profitability or if investors will wish to buy your stocks at the price you want to sell.
It’s essential to assess each investment for its possible risks before committing your funds. Consider how your goals would be affected if you couldn’t get your money when you needed it, if you didn’t make a profit, or if you lost your funds. Also, think about how comfortable you are with taking risks.
If you follow these four guidelines, you will be able to develop the knowledge and expertise which will allow you to participate in the wide world of investing and increase your net worth over time.
Copyright © 2014 Cherryl Hanson Simpson. No reproduction without written consent.
Originally published in The Daily Observer, February 27, 2014
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Cherryl is a money coach and business mentor, and founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmart.org. Contact Cherryl