Everyone desires to be wealthy. The media is awash with a lot of songs and videos popularised by mainstream musicians and actors echoing this desire. Living large and living well is a goal many people would like to achieve especially in a tough economy such as ours. This desire to live well is what encourages people to be more deliberate about their financial situation: how much they earn and how much they keep.
Many people are so focused on having enough money to meet their needs and wants, that they do not often consider investing. Their understanding of money is often limited to keeping their money in a savings account or maybe even joining a thrift scheme. Some may have even tried investing previously but ended up having poor results for various reasons which may have put them off.
Investing money is one of the key approaches to making your money grow and work for you. While money in a savings account can earn a little interest, money placed in a specific investment product can potentially earn much more than the initial invested sum, depending on the adopted investment vehicle. We all have financial needs and very often, our direct income may not be able to meet all of those present and future needs. Investing is one means of ensuring the likelihood of meeting our financial needs.
In considering your investment journey, it is usually helpful to start with a pool of funds. This could be money that you have been saving over some time, unexpected funds like a financial gift or business profit that you haven’t yet decided what to do with, or maybe even a bonus at work. Having this pool of funds is critical to launching your investment process.
When it comes to investing your money, it is usually important to have a fair idea of what your investment goal is. Why are you investing your money? What targets are you aiming for? How long do you want to invest? Are you planning to raise funds for a fairly immediate need (school fees in the next few months) or maybe a long-term need (house rent in the next year) or maybe even a longer-term goal (building your house)?
Determining whether your financial goals are short-term or long-term helps in deciding how and where to invest, and how much to expect as returns. This would also depend on each investment product. Another critical thing to consider is your risk appetite. This refers to how much risk you are willing to expose your investment to; how open you are to investing in diverse types of products which could either gain or lose significantly.
There are different types of investment products available within the financial system, and the more common ones include stocks, bonds, and mutual funds.
Stocks: these represent a share of ownership in a company and people who purchase stock are called shareholders. The company uses their funds to execute its business objectives and those shareholders are entitled to receive income (also known as dividends) from the company when they earn profit. The total collection of stock owned by shareholders is traded on a stock exchange and shareholders can also decide to trade their stock for financial value instead of waiting for dividends. Stocks are subject to market conditions and the company's performance so their value isn’t static. Stocks can be high or low-risk investments due to the effect of the external considerations that influence the price. One can purchase stocks with a little amount of money.
Bonds: these are debt instruments issued by governments or corporations for capital raising. Purchasing a bond is lending money to the bond issuer in exchange for interest payments and full return of the principal investment amount on maturity of the bond. Bonds are considered low-risk investments because the income received is fixed. Purchasing bonds may require a larger amount of money depending on the terms of the bond.
Mutual funds: these are products created by pooling together funds from many people to invest in a portfolio of diversified investment products which may include stocks, bonds, or other investment products. The funds are managed by professional fund managers who decide how to allocate received money. Mutual funds offer a good way of hedging risk as the funds are invested in a wide array of investment products. Purchasing mutual funds does not have to cost an arm and a leg as they cater to all income types.
There are also other investment products such as real estate, pension funds, annuities, and commodities trading, to mention just a few. Investing your money will help you achieve greater returns if done properly. The key to investing is to speak with a financial advisor who can help you identify your financial goals and work with you in building your investment portfolio.
