Investing involves utilizing capital in the present with the aim of increasing its value in the future. It requires the allocation of resources such as time, money, and effort, in the hopes of achieving a greater return than what was initially invested. An investment can encompass various mediums or mechanisms that generate future income, including bonds, stocks, real estate, and alternative investments. It is important to note that investments do not come with guarantees of appreciation, and there is a possibility of ending up with less money than the initial investment. To mitigate risk, investments can be diversified, although this may reduce the potential for earnings.
Investment Fundamentals Explained Alongside Investment Types.
Stocks/Equities
A stock represents ownership in a public or private company, entitling the investor to dividends from the company's profits. As the company grows and attracts more investors, the stock's value can increase, allowing for capital gains upon sale.
There are two main types of stocks: common stock, which grants voting rights and participation in company decisions, and preferred stock, which has priority in receiving dividends over common shareholders.
Stocks are typically categorized as growth or value investments. Growth stocks involve investing in small companies with potential for market success, while value stocks involve established companies whose stock price may not reflect the company's true value.
Bonds, on the other hand, require an initial investment and pay periodic amounts until maturity, when the investor receives the principal back. Bonds are used by entities to raise funds, with investors earning yields on their contributions.
The regular payment to bondholders is known as a coupon payment, and the bond's price fluctuates to adjust the yield. For instance, a bond with a fixed 5% coupon payment may decrease in price if market opportunities offer a 6% yield, resulting in a higher yield for the investor.
Derivative products can amplify returns or losses on investments, but they come with high risks and are not recommended for inexperienced investors.
