Investments: what is it
Investment is the investment of money to generate income or to preserve capital. There are financial investments (purchase of securities) and real ones (investments in industry, construction, and so on).
People who invest are called investors. Anyone can become a private investor – a middle manager, a financier, a doctor, a teacher, a student or a pensioner, this does not require special education. For them, this is a way to earn extra income.
Traders are the opposite of investors; they constantly conduct short-term transactions, this type of activity is their main source of income.
While investments are aimed at generating profit for the investor, they are not a guaranteed way to get it. Different ways of investing provide different guarantees of income, but in all cases there is a risk that instead of profit, the investor will receive a loss.
Ways of private investment
There are many ways to invest in the stock market. Some do not require deep knowledge of the financial markets, while others are only for professionals.
The most common items for investment on the stock exchange include:
- Investments in stocks.
- Investments in bonds (government or corporate).
- Investments in precious metals (gold, silver, platinum).
- Investing in ETFs
- Buying a currency.
- Investments in derivative financial instruments (futures, options, swaps, etc.)
For convenience, private investments are divided into groups depending on the timing. There are three in total:
- short-term (period up to a year);
- medium-term (from 1 year to 3 years);
- long-term (from 3 years and longer).
Nowadays, there are two main styles of investing. The first is passive investing. It is a long-term investment. This style assumes that a person has invested money, for example, in shares of a company, and holds them for several years without selling.
As a rule, passive investments are made in large commodity, technology, financial companies – they have a lower risk of a sharp drop in quotations, often such companies pay dividends.
The second style is aggressive investing. This implies that the investor invests in more risky instruments. For example, in shares not of industry locomotives, but in shares of smaller companies – with market fluctuations, such securities grow or fall more strongly (that is, they have high volatility), but due to the same quality, you can earn more.
This type of investment requires a deep understanding of the market and a willingness to lose invested funds.
How to invest as a private person
An individual cannot trade on the stock exchange on their own. This is done by brokers, and they also act as intermediaries between the exchange and the investor. You need to open a brokerage account, after which the account holder is given the opportunity to buy / sell securities.
Brokers also provide services of a professional manager. Together with specialists, you choose an investment strategy, agree under what conditions which shares to buy/sell, and then situational decisions on your portfolio are made by the manager.
Do I have to pay taxes on investments
There are three most common ways to make a profit. Get the difference between buying and selling a security, get a coupon payment on bonds or dividends. All three types of income are taxed. The broker pays them to the state for the investor.
Profitability and risks
Investments have two key qualities that are directly related. This is return and risk. The higher the risk involved in an investment, the higher the potential return can be. And vice versa – relatively reliable investments never allow you to count on high earnings.
For example, a bank deposit, which can also be considered an investment, or the purchase of government bonds are low-risk investments. Bank deposits are insured, and in the case of government bonds, the state acts as a guarantor of the return of money.
But the return on such investments is also lower than the potential return on stocks, which can be affected by a variety of reasons from market to corporate.
Another example can be given to illustrate the relationship between risk and return. Bonds with a 10-year maturity bring the buyer more income than, for example, three-year bonds.
The following principle applies here: the higher the maturity of the bond, the greater the risk the investor takes (after all, a lot can happen even with government bonds in 10 years) and, accordingly, the more he needs to be rewarded for this risk.
Investment portfolio and its diversification
The totality of all investments made by an investor is called an investment portfolio. An investment portfolio may consist of shares of a single company, but analysts and experienced investors recommend not spending all your capital on one security.
To reduce risks and increase the return on investments, the investment portfolio is diversified – that is, investments are divided between different securities.
Even developed economies and large companies inevitably face periods of recession and stagnation. To protect against such situations, the investment portfolio includes not only stocks, but also bonds, deposits, exchange-traded funds. Professional investors add to the portfolio contracts for the supply of goods – futures.
The most risky, but at the same time the most profitable part of the portfolio include shares. Exchange-traded funds are the golden mean, associated with relatively low risk and high return.
The protective part of the portfolio – bonds and deposits that stabilize the portfolio in case of strong volatility, this is the most reliable part of the portfolio.
In addition to asset diversification, it is also important to distribute the portfolio across sectors or sectors of the economy. The importance of such a principle is well seen in a close examination of any economic crisis. During such periods, when some stocks fall, others rise.
This creates a balance and allows you to minimize losses.
What are the investments
The concept of investment is not limited to private investment in securities or financial derivatives. In a broad sense, the term “investment” can be extended to any investment by an individual or a company, whether it be money, tangible assets or intangible assets.
Main classes of investments:
- Real investment. These include, for example, the purchase of a ready-made business; acquisition of intangible assets such as patents, copyrights, trademarks, etc.; construction, reconstruction, overhaul.
financial investments. These include the purchase of securities or derivative financial instruments.
- Speculative investment. In this case, the main feature of the investment is the rate on income due to changes in the price of the asset. The principle of “buy low, sell high” applies. The subject of speculative investments can be stocks, and in addition to them – currency, precious metals, bonds.
- Venture investments. So called investments in young companies for the long term. Venture investments are associated with a high risk of completely losing investments, but they can also bring excessive profits to investors.
- Portfolio investment. This is an investment not in one type of asset (for example, a share of a particular company), but in several at once, which are formed in the form of a portfolio of several securities.
Intellectual investments. This is how investments in an intellectual product are called. This may be the training of specialists, scientific developments, objects of intellectual property, the creative potential of a group of people.