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You have ever considered investing but aren’t sure where to start. Read on to learn more about investing.
In simple terms, An investment is when you buy something with the hope of it increasing in value.
When you first decide to invest you don’t need to start with a large sum of money, just be comfortable with the amount of money that you choose to invest.
There are a number of different ways that you could choose to invest, including stocks and shares and funds.
WHY SHOULD YOU INVEST?
If you have savings and you’d like to try to grow your money over the long term, then you could consider investing some of it.
You can also save for the future in cash accounts and the interest can also provide additional income and liquidity should you need it. The downside to cash savings is that inflation can eat away at the value of your savings over time.
WHAT’S YOUR REASON FOR INVESTING?
1. Invest for income
If you want to create income from investing one option is to choose investments that provide regular payments. For instance, shares pay a dividend and a bond pays interest.
2. Invest for growth
Investing for growth is the aim of increasing the value of your investment known as capital gains. If you were investing in stocks and shares for example, growth would be the result of an increase in the price of the shares.
3. Compound growth
Compound growth can be defined when you re-invest dividends which can generate extra earnings over time. The asset accumulates growth from the original investment and the added earnings are known as compound interest.
Most investors will invest for both growth and income, for example an income investor could use the income from their investments and reinvest this with the aim of generating, and a growth investor might sell their investment to gain an income.
DIFFERENT TYPES OF INVESTMENT OPTIONS:
1. Shares
When you purchase shares you’re buying a stake in a company. Shares are traded throughout the day on the stock exchange and the price can go up and down.
You can earn money from shares via capital gains and dividends.
- Pros: Capital gains
If you choose your stocks and shares wisely they could rise in value over time. Shares have generally provided better returns than cash if you’re investing for a longer term, although this isn’t guaranteed.
- Cons: Capital losses
If you were to invest a company that isn’t growing in value then the share price could drop. This can result in a loss of money to your investment.
2. Funds
A fund is a collective investment which means your money is spread over a range of different markets, unlike a share when you own a slice of a company. Funds are managed by a professional Fund Manager who decides on where to invest your holdings. With funds you buy units which can either increase or reduce in price.
• Pros: Diversification
Funds spread their holdings across a number of different sectors, markets and stocks which can reduce the risk. If one holding performs poorly over a certain period, then you have a chance of other holdings performing better which can reduce the potential losses to your investment portfolio.
- Cons: Liquidity
A fund manager might need to sell holdings to pay investors who are withdrawing the fund. If the asset is difficult to sell like property then this can result in delays in receiving your money back.
3. Exchange Traded Funds (ETFs)
Exchange Traded Funds trade on a stock exchange like shares. However, unlike shares which are focused on one company, ETFs track an index, commodity, sector or currency and invest in a range of assets with an aim of closely tracking the performance.
• Pros: Lower fees
Benefits of an ETF are its cost effectiveness. They offer lower fees than managed funds due to lower operating costs.
• Cons: Performance
ETFs track a market unlike funds which are actively managed and try to outperform the market. This can impact the performance.
4. Investment Trusts
An investment trust is a company that raises money through selling shares to investors which then pool the money to purchase and sell a range of investments. Investment trusts can vary with different aims and mixes of shares and assets.
• Pros: Liquidity
Investment trusts don’t need to sell the assets when an investors exits the fund, which means investors can sell their holdings more easily on the stock market. The price of an investment trust can could reduce when more units are sold than bought.
- Cons: Potential Price Volatility
The price of an investment trust can be influenced by the demand for the share. In a scenario where investors don’t feel the investment trusts is being managed as well as expected then this can impact the price when investors want to sell rather than buy.
5. Bonds
Bonds are a way for companies or governments to raise money which is done by borrowing money from investors. When you invest in a bond or gilt you’re lending money to a company or government which in return provides a fixed rate of interest.
• Pros: Stability
Bonds have lower risks than stocks and have the potential to provide a more stable return over time.
• Cons: Growth Potential
The drawback of bonds is that they don’t provide higher long term returns compared to other stocks. Bonds can be impacted negatively by changes to interest rates, economic uncertainty and currency fluctuations.
6. Commodities
Commodities such as Gold, oil and gas, agro produce are also Forms of investment to grow wealth. Gold in particular has been a storage of wealth since ancient times and it’s value is tied to the value of the United States Dollar.
You could invest in gold as jewelry, gold bars or by buying Gold ETFs.
Are you ready to invest?
Before you make the next step to invest, please read the below statements and make sure you agree with all of them:
- You have a minimum of three to six months net income easily available to cover any emergencies and any planned spending over the coming years.
- You agree to take some risk in investing.
- You have a long term mindset and are ready to invest for at least 5 years.
- You don’t hold significant short-term debts, because they could cost you more in interest than the amount of return you see on your investment.
- You’ve carried out your own research and feel confident that it’s the right time to invest.
If you’re not sure about investing, seek financial advice. You can schedule a consultation with me to help you get started with your financial planning.