You have heard it a million times: Invest! invest!! Invest!!! And while it sounds like pretty decent advice, it still leaves you clueless as to how to begin your investment journey. What do you invest in and why? How do you compile a pretty decent portfolio and what does this portfolio contain? In today’s blog, I’ll simplify just about everything you need to know about investing as a startup investor. Welcome to the ABC of Investment.
What does it mean to Invest?
Investment means to allocate money into certain engagements, institutions, or establishments with the expectation of making a return in the near or distant future. This return on your investment is called your ROI (Return on Investment). It is the goal of every investor to acquire assets that appreciate over time.
Becoming an Investor
To become an investor, you need two things:
- Money to allocate
- Somewhere to allocate it to
Speaking of which, let’s find out the different areas you can invest in:
The Investor’s Playbook
As an investor, you are at liberty to consider either or all of the following instruments for your investment:
- Mutual Funds
- Cash Equivalents
Stocks represent a percentage of the ownership in a company. When you buy stocks, you are essentially saying, “Hey Company, I trust that you will do well in the long run so I’m pumping some of my equity into your account. Not for free though. In exchange for my faith in you, I will receive some dividends as earnings and I will have the right to vote out or vote in new directors at your institution.”
When you’re right, you earn handsome dividends from the company. When you’re wrong though, you agree to share in the misfortunes of the company.
Companies often need loans to survive and when they do, they go to banks, right? Well, not all the time. At times, a company will come to you, the investor. In exchange for whatever funding you offer, the company will sell you their bonds and consequently pay an annual or semi annual interest coupon. At the end of the day, you receive your capital on a maturity date determined at the beginning of your agreement.
Which is safer for you as an investor: Stocks or Bonds?
An investor must constantly weigh the risk associated with an instrument and determine if it is one he’s willing to undertake. Generally, stocks are a bit riskier than bonds. With stocks, you are putting your faith in the company, agreeing to share in the profit or losses. With bonds, you’re certain that the company will pay you back with interest.
But note, while stocks are riskier, they also hold the most potential for astronomical returns. Bonds, on the other hand, usually return less than stocks.
Which should you stick with?
Your decision as an investor should depend entirely on your risk appetite. Your risk appetite is defined by how much of your account and portfolio equity you’re comfortable losing per time.
Diversifying your Portfolio
You can go with stocks or bonds, but who says you have to choose. Every investor has the option of purchasing several instruments at the same time. Your portfolio can in fact be 40% stocks, 30% bonds, 20% mutual funds, and 10% commodities. It all depends on you. If you’re unsure what mutual funds and commodities are all about, don’t worry, you will learn about them in future blogs.
Whenever you’re ready to begin your investment journey, go to pulsehound.com.
pulsehound allows you to organize and access all your investment information in one place.