Why And How To Invest?

why to invest

Investing allows you to grow the money that you currently have by putting it in vehicles that have the potential to earn strong rates of return. If you are not investing your money, you are missing out the opportunity to increase your wealth. Investors earn money by earning interest on securities that they own or buying those assets that increase in value.

To understand how to invest, one must know where he/she can invest, as different investment strategies involve different methods of investing.

Where to Invest?

Investment can be done in Shares, Mutual funds, Bonds, Precious Metals (Gold, Silver etc.), Futures, real estate, cryptocurrency or combination of assets. 

Shares – also known as Stocks, a Share or a stock represent a unit of an ownership interest in a Corporation. Companies issue shares to raise capital from different individuals or corporations. Many a times, the earnings of the company get distributed among the shareholders. Companies that issue shares privately are known as private companies and companies that issue shares publicly on stock exchanges are known to be Public Companies.

Bonds– Bonds allow investors to earn fixed income. Bonds are issued by entities (typically corporate or governmental entities) to borrow money for a specific period of time at variable or fixed interest rates. There are different types of bonds – Government Bonds, Municipal Bonds, Corporate Bonds etc.

Mutual Funds– Mutual fund is pool of money which is collected through different investors to make investments in diversified group of assets. These are managed by Professional money managers which invest money in different investments to earn capital gains and earn returns.

The investment in Stocks, bonds, mutual funds, precious metals can be done through different platforms. For stocks, you have stock exchange or stock market, which is a platform where stock brokers and traders interact with each other for the purpose of buying and selling of securities.

Understand Risk versus Reward

Risk is a vital part of investing. All investments carry some risk and there is always a possibility of losing money in Risky Assets. The potential return of the investment sometimes increases with the risk associated with the investment. More risky investments may have more potential rewards associated with them. However, more riskier investments may turn the table towards a big loss as well. An investor must know how much of risk he/she is willing to take, and the risk associated with the investments can be known by evaluating the investments. Generally, when IPOs (Initial public Offerings) come to market, they disclose the associated risk that they might face in future so that the investors could make an informed decision. At the same time, less riskier investments may give stable returns over a long period of time. Thus, risk appetite is a crucial parameter to consider before investing.

Understand Different Types of Investment Strategies

Value Investing – As per this strategy, Investors buy those securities which they think are underpriced and hold till the prices rise. Usually it takes a lot of fundamental and technical research to know whether a security is overpriced or underpriced. This technique of investing requires lot of patience, but it has a potential to help earn handsomely.

Income Investing- In this technique, the investors usually invest in fixed income securities that pay returns on a steady schedule like Bonds. This type of investment is less risky and provides a reliable income stream.

Growth Investing- In this investment strategy, investors look for those securities that are showing signs of growth, through revenues and profits. Many investors like Warren Buffet use this strategy and invest in smaller companies that have high potential for growth, and expansion purview in emerging markets.

Investors needs to learn about different strategies, to understand best style that suits them. There are several mistakes that investors should avoid while investing. Nevertheless, sometimes failures set the pillars for success.

Mistakes to Avoid while investing

Many times, investors get attracted to high rate of returns and they fail to assess the associated risk with the securities. Investors should properly manage the risk to make the right investment. Investors must always try to diversify the portfolio to manage the risks. Diversification of portfolio helps investors to mitigate impact from any market uncertainties. Understanding the investment is also very important. An investor must always know in what he/she is putting money into. Knowing about investment makes investors more aware about the situations and it also helps in taking decisions like when to sell or when to hold the securities.



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