Business Education: Investments for Beginners
SO, you want to invest? But without any experience in the world of investments - when deciding where to start can be quite daunting at first. The best place to start can be investing in mutual funds - that are relatively safe investments, before moving on to bonds, stocks and alternate investments.
In the following article, Aparna Iyer explains the purpose of investing your money and the difference between mutual funds, bonds, stocks and alternate Investments. Browse the links For more information regarding business education or visit CBN for other business related articles.
Investments for Beginners
By Aparna Iyer
Investing refers to purchasing financial products with the expectation of receiving a regular income or witnessing an appreciation in the amount of infused capital. Every investor needs to have a strategy depending upon his/her appetite for risk, the predefined goals and the time horizon. An individual's time horizon, that will determine the length of time during which the money is invested, depends on the time periods when the desire for liquidity will be the investor's prime concern.
The Purpose of Investment
Investments are undertaken for the purpose of capital preservation or for quenching the desire for capital appreciation. While the former is a conservative strategy that aims to avoid the loss of invested capital by ensuring that the return on investment is at least equal to inflation, the latter results in an increase in the market value of the investment. Capital growth/appreciation is desired by people who are in their youth and are willing to pursue aggressive strategies that involve assuming above average risks in anticipation of above average returns. Capital preservation is for the cautious investor and people who cannot risk the loss of capital and hence pursue conservative strategies that provide regular income in the form of interest and dividend.
Investments for Beginners
Beginners can try investing in mutual funds and then move on to bonds, stocks and alternate investments.
Mutual Funds: Mutual fund managers raise money from people by issuing shares and investing the pooled money in assets like stocks, bonds, and other securities, in accordance with the stated set of objectives. Mutual funds are managed by professional money managers who ensure diversification of capital by investing in a vast array of securities. The transaction costs are also lower on account of economies of scale. A person, who invests in mutual funds, is entitled to receive interest income from bonds and dividends from stocks which may be distributed to the shareholder in the form of cash or additional shares. Capital gains are also likely in case the fund sells securities that have increased in value. The investor may also sell his/her share in the mutual fund for a profit. Mutual funds can thus prove to be the best investment for beginners. One must remember that the profitability of the fund is contingent to the fund manager's abilities in choosing appropriate investments.
Bonds: Bondholders are the creditors of a company and are entitled to receive interest for the amount of money that is loaned by them. Although this seems like a risky investment, buying bonds issued by the government of an economically and politically stable country entitles the bondholder to a steady stream of income. In the US, the government issues Treasury bills, Notes, Treasury Bonds, Treasury Inflation-Protected Securities (TIPS), I Savings Bonds and EE/E Savings Bonds. In addition to investing in the bonds issued by the Federal Govt, investing in tax free municipal bonds, like General Obligation bonds (GO) and Revenue Bonds, that generate income and also result in capital preservation, can be a wonderful option. A number of municipal bonds are exempt from federal, state and local income taxes. It is worth mentioning that Treasury bills do not pay interest but are sold at discount to par. The appreciation in the value of the bill provides the return to the bondholder. The interest, in case of Treasury Notes and Treasury Bonds, is exempt from state and municipal taxes but is federally taxed.
Stocks: In the articles, "How to Play the Stock Market", "Online Stock Trading Tips" and "Buying Stocks Without a Broker", stock investment for beginners has been explored in detail. It will suffice to state that stock investing is an activity that requires considerable knack for picking the right stocks.
Alternate Investments: People who have experimented with the aforementioned investments for beginners, can move on to derivatives and commodities trading.
An investors needs to determine a suitable strategy and decide on the level of risk that he/she is willing to undertake before venturing into the world of investments.
Date Created: 2009-08-20 |
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