Budgeting often allows people to set money aside for investing. An important rule of thumb to keep in mind with investing is the higher the risk, the higher the return and vice versa. As there is the potential to make money with investing, there is also the potential to lose money.
To help manage this risk, when developing your investment portfolio make sure you diversify by using different investment tools and investing in various industries and companies as this strategy helps decrease the risk associated with investing! Do NOT put all your eggs in one basket!
Some investors prefer a risky-portfolio (in hopes of making more money) and others prefer utilizing a more risk-adverse strategy (less risk with smaller returns).
No matter what type of investor you are, there are ways to use the various types of investment tools out there. Basic common investment tools are stocks and bonds. We will first discuss the traditional tools and then we will introduce a more modern investing tool called spread betting.
WHAT IS A STOCK?
Have you ever wanted to own a piece of a company before? I’m here to tell you that you can do so by purchasing stocks. A stock is a small piece of the ownership of a company.
Only public companies issue stocks. As public companies are so large, they have many owners as this allows them to have access to more capital. Two examples of public companies that issue stock are McDonalds and Coca-Cola. A stock is a very traditional investment tool that has been around for a long time.
WHAT IS A BOND?
A bond in it’s simplest form is a loan. The bond relationship includes bond issuers (borrowers) and bond holders (lenders). The lenders give the borrowers money and then the borrowers repay the principal amount plus interest to the lenders.
Bond prices are determined by interest rates and the probability that the borrowers will default on the loan. Large companies and even government issue bonds (take on debt) when they need capital and repay the amount plus interest to the bond holders.
Bonds are typically perceived as a low-risk investment; however, there are different types of bonds. This means that one should understand all of the terms associated with the selected bond before making the actual investment.
WHAT IS SPREAD BETTING?
Spread betting is a newer, more innovative way of investing. It allows you to trade on the price movements (up or down) of financial markets. With spread betting you can take two positions – going long or going short.
You go long if you think that the price will increase; you will make a profit if you can sell it for a higher price than what you initially paid for it. This being said, you go short if you think the price will decrease and will make a profit if the price drops.
Here is a table that will help summarize these points:
Managing your money efficiently can allow you to set money aside to invest with the goal of making a profit. You can use your money to make money with the proper investing strategy in place.
There are a variety of investment tools that you can use to help decrease the risk and increase your chances of making money! Remember to diversify, diversify, and diversify! Happy investing!
How often do you invest? What are some of your investing strategies? Please feel free to share them with us below in the comment section.