You might have a specific savings goal that, nonetheless, you don't have to meet for at least another five years. In that instance, placing some of your money into investments can enable you to make money more quickly and prevent inadvertently getting hit by increases in prices.
What Are Investments?
An investment is something you place money into with the aim of reaping a profit in return. There are four kinds of investment that people tend to choose from especially commonly. These types, called "asset classes", are shares, cash, property, and fixed interest securities.
A share is a stake in a company - while, above, cash refers to savings kept in an account with a bank or building society. Property means a physical building, either residential or commercial. Finally, with fixed interest securities, which are also known as bonds, you make a loan to a company which will, in return, pay you a steady income and, at a fixed date, the money you initially lent.
However, you might also want to look into other forms of investment - like foreign currency, collectables like antiques and art, and such commodities as gold, oil or coffee. When you bring a variety of assets into your ownership, you are developing what is called a portfolio.
How Can You Make Money From Investments?
Among investment jargon, "returns" refers to profits that you make from investments. However, the exact way you get those returns can depend on the nature of the investments.
If for instance, you have bought shares in a company, the company can pay you back through what are called dividends. Meanwhile, property investment can bring returns through rent paid by tenants. Bonds produce returns through the accumulation of interest.
However, companies that manage investments on your behalf will charge fees for their services. The expense of these fees can cut uncomfortably into your returns, so it's something to consider.
But Isn't Investing Risky?
This is one question that might have been in your head as you have read this article. It's true that gambling with savings can feel deeply comfortable - and that there are more secure deposits, like savings accounts, into which you can alternatively place your money.
However, while using one of these accounts can help you to accrue interest, that interest isn't guaranteed to routinely keep up with inflation - the rising cost of living. Therefore, while investments are never entirely without risk, they can bring much bigger financial returns.
Still, that does depend on you being sufficiently clever with how and where you invest. Going into investment endeavours while aware of the risks can help you to ensure this. You should, for example, consider that index-linked investments can adhere to the inflation rate while disregarding market rates - creating a situation where interest you earn could fall short of your expectations.
There is one particularly tried-and-trusted method of reducing the riskiness of investing, however - and this is known as "diversifying". With this method, you place your money into a greater range of products and asset classes, therefore spreading the risk.
Should one investment falter more than you had anticipated, you could then at least fall back on other investments in your portfolio. This makes diversifying an especially good tactic if you are only just starting out as an investor.
Tips If You Are Indecisive About Where To Invest
There is a huge range of investment options - so huge that you could be excused for remaining uncertain about which of them to take. A good starting point for relieving such indecision, however, is considering how much risk you would be willing to take.
This is because some kinds of investment are riskier than others. Low-risk - well, as far as investments go - are such fund-based options as unit trusts and Open Ended Investment Companies, commonly abbreviated as OEICs.
You can invest in a unit trust by either putting forward a lump sum or saving a specific amount monthly. Meanwhile, investing in OEICs means buying companies' shares. However, with your money being added to a single large pot also containing other investors' cash, your money can be poured into a greater variety of assets. Thus, the risk is more greatly spread.
The inclusion of "open-ended" in the term Open Ended Investment Companies indicates the absence of any limit on how many shares you could purchase in a company.
You could, however, have a taste for riskier investing; in fact, for you, the risk may even generate the most excitement in your investing campaigns. While we would still urge you to exercise a sensible degree of caution, you could seriously consider spending time with spread betting and CFDs.
Other Investment Decisions That You Need To Make
If you already have significant experience of investing and as a result, feel confident about your aptitude for investing, you could choose to be very active and hands-on with your further investment efforts. However, if you are actually a novice in this area, you might prefer to seek expert help.
That expert can make many of your decisions for you, but you might still want control over the amount of money you invest and how often you put some of that money forward. Would you prefer to make a lump sum deposit or have funds drip-fed into the investment account?
Also, would you want your investment to provide you with an extra source of income, or would you favour instead reinvesting any returns you get?
Whatever decisions you want to go ahead with, you should double-check the applicable charges and how the investment will be handled - whether by you or externally. If any doubts start creeping in, you might wish to reveal your concerns to an Independent Financial Advisor before committing yourself financially.
Investing can be very fun, provided that you approach it appropriately and have the right personality to excel as an investor. Don't be afraid to back out if, after thoroughly researching the subject, you feel that you shouldn't really invest at all.