There are several things to consider if you are thinking about investing. Where do you go to purchase an investment? What are all the available options? How do you know which is the right one? When is the best time to buy or sell an investment? Whom should you trust to give you advice? Why should you even invest your money at all?

It can be initially difficult to find answers to these questions. After all, you can’t just walk into an investment superstore, browse through the aisles, read the labels on the different products, ask the store attendant some questions, select the right option and pay for it at the checkout counter.

If investing was as easy as shopping, we would probably all be very wealthy!

Let’s take a deeper look at the process of buying financial investments by examining how entities offer investments to the public and where you can go to purchase them.

Markets are essential

A market is a very important structure that connects persons who have products to sell and persons who wish to buy them. Having a central location where buyers and sellers can interact is vital for commerce. Imagine how challenging it would be to get farm produce if the growers had to leave their fields and go directly to people’s homes in order to sell their goods.

Similarly, it would be very difficult to buy and sell (trade) investments if we didn’t have special markets for them. Just like a supermarket where you can purchase grocery items, there are markets where you can buy different types of investments. A financial market is a structure that facilitates the organised trading of financial instruments.

However, unlike a supermarket that offers a wide variety of items, financial markets are more exclusive about the types of instruments that are traded there. Investment instruments can be grouped together according to their common features, which are called asset classes. Different financial markets trade instruments within specific asset classes.

A supermarket acts like an intermediary, or a ‘middleman’, in order to bring together sellers of various products and a large number of buyers; and most financial markets operate in the same way. They use intermediaries called brokers or agents who act on behalf of the buyers and sellers and help to make the process of trading investments easier.

An investment is born

Now that we have looked at the purpose of a financial market, let’s examine how an investment is created and offered to the public for sale.

A security is a legal investment instrument that has an expressed value which represents an investor’s rights to own certain assets or claim over future income streams. Securities are standardised investments, as they have uniform characteristics and operate according to specific criteria. So although buying real estate is an investment, an individual’s property is not considered a security.

The market for trading in securities can be divided into two segments. In the primary market, new securities are created by entities such as governments, large corporations or financial institutions, and offered to the public for the first time. These issuing entities usually wish to raise money to carry out their operations, and investors pay them to get the benefit of owning these securities.

Investors are sometimes able to go directly to the issuing agencies to purchase new investments, but they are mainly sold through broker intermediaries. These agents will receive a commission from the issuers, which is usually a percentage of the total value of the investments that the brokers’ clients purchased through them.

In the secondary market, securities that were previously issued in the primary arena can now be bought and sold among investors, usually through broker companies. This trading gives the original investors the ability to receive cash in exchange for the securities they had purchased, and the possibility to realise a profit on their initial investment.

Widening the market

In the securities markets there are two main methods in which the buyers and sellers can connect. In over-the-counter trading, two parties will get together to agree on a mutually acceptable contract for a security. This can be done through the telephone or Internet, and may involve dealers who act on behalf of the two parties. These transactions are usually customised for the clients.

The other means of connecting is through a central exchange, which is an organisation or company that provides facilities for the trading of financial instruments. An exchange could be a physical location where people meet to trade, or a virtual location where electronic transactions occur. A security has to be listed on an exchange in order for it to trade there.

The operation of these markets could be compared to the process of buying a car. If you wanted to buy a new Honda, you could purchase it from a dealer who would be an authorised representative of the Japanese corporation. This would be a primary market transaction. In the secondary market, you could resell your car directly to another buyer, or sell it through a used car merchant.

Next week we will continue to simplify the process of investing your money.

Copyright © 2011 Cherryl Hanson Simpson. No reproduction without written consent.

Originally published in The Daily Observer, August 18, 2011

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Cherryl is a financial consultant and coach, founder of Financially S.M.A.R.T. Services. See more of her work at www.entrepreneursinjamaica.com and www.financiallysmartonline.com. Contact Cherryl