Investing refers to a systematic process for creating wealth by utilizing financial instruments. Financial instruments include stocks, bonds, mutual funds, derivatives, and real estate property. In simple terms, investing means to invest money with the hope of gaining a return/value in the near future for your investment. Simply put, to invest simply means having an asset or a piece of property with the intention of creating income from the increase in value of that asset over some period of time or an increase in your investment that is an appreciated increase in the asset’s value. Most people believe that the process of investing is very complicated and need professional guidance and investment advisors to make it work. They are also afraid that investing is something that might not return to them at all.
One of the safest and most reliable ways of building wealth is through bonds and stocks. However, these types of investments have one major limitation. They cannot grow on their own. They require your financial input along with time and patience. The growth potential in such investments are limited but there are several advantages that go with these investments and they make up the safest and most reliable form of investment.
There are various advantages of investments in stock and bond markets. For example, in stocks you are guaranteed a minimum return on your investment and also enjoy relatively high rates of dividends. Bond markets can provide you with fixed interest rates and longer maturity dates, thereby ensuring a steady flow of income.
Before investing you need to identify your asset categories. You should make a list of all your assets so that you know what to buy when. For instance, if you have fixed income investments such as bonds and stocks, then your priority is going to be fixed income. Similarly, you would not want to start investing in equities until and unless you have a steady flow of income.
Once you have made up your list of assets, you need to make a list of potential investment options. The first thing you should do is to identify your risk tolerance and decide whether you are willing to take the ups and downs of the market. If you are a conservative investor, then you are likely to accept less than optimal returns in return for your investment. But, if you are a more aggressive investor, then you are more likely to accept larger returns at higher risk in order to gain bigger profits.
Your next step is to identify the returns you expect from your chosen investment. There are two different ways of measuring capital gains. One is immediately after purchase and the other is over a specified period called a benchmark capital gain. When you purchase an asset, you are actually paying for it immediately, whereas the benchmark capital gain period refers to the period of your asset is considered as new in the market. This is important because you must understand the risks and rewards associated with any type of investment before proceeding with it.