Investments come in various forms. On this website we discussed various forms of investments previously. Now we will talk a bit about other aspects of investments in general. First before any investment is made one has to have a general goal in mind. This is called an objective. The objective can be used to determine what investment type is best suited to the individual or corperation. The various aspects include risk, return, inflation, security and liquidity.
Any investment we make usually is associated with an underlying risk. most of the time, risk has a linear relation to return. Usually, investments with low returns have low risk and investments with high returns have high risk. If anyone tells you otherwise it is probably best to look more closely into the investment they are offering.
Other sources of risk that is to be noted is current events that are happening in news. Pay attention to news and politics in the place of investments. For example, it is wise not to invest in a country that currently at war and is experiencing an unstable environment to invest. Even for a business it is important to check if the business you’re investing in stable or not.
Another risk that is very important is inflation. Inflation is the related to the purchasing power of our money. Over time inflation generally increases, which means as years go by the ability to purchase goes down with the same amount of money. It is important to pay attention to this when making an investment.
For example, let’s say we have an inflation of 3% per year, if I invest my money into an account that gives me only 2.4% return. Over time I am actually losing money. This brings another point to mind, if you have money sitting in your bank doing nothing. Over time, you would actually be losing money because of inflation. So I usually advise everyone to take part in some form of investment and letyour money to work for you and beat inflation to some extent.
When we invest had our earned money we want to make sure that our initial investment is secure. For example if I invest $100, 000. I want to make sure in case the investment fails that my initial capital does not take a hit. This is called the security. The security is the capital protection which means that the initial amount invested has the possibility of being recovered safely.
When we invest we usually get possession of a certain asset. When we sell this asset the time it takes to recover the investment is known as the liquidity of the investment. This is important because if the market value is falling the ability to retrieve the investment as quickly as possible becomes a way to secure the capital we put into that investment. The liquidity is effected usually by the volume of buyers and sellers available. A low number of volume usually means less liquidity.
The type of returns we can get from an investment is also important. The return is the increase in value of the financial product. It’s basically your source of profit from an investment. There are mainly three types of investment return. The first type is called interest return. This is the return on money loaned. It similar to how one has to pay rent to own a house that they haven’t brought. This basically allows you to give your money out as an asset for others to rent. This type of income is fully taxable.
The second type of return is the dividend return, this return is profits that are handed out to shareholders who possess a bit of the company’s shares. Since the profit is already taxed within the company already, the taxes are usually only applied to the portion of the dividend return. In most cases it can around 2/3 of the total return.
The third type of return is called capital return, this is when an asset is sold at a higher value than its initial price. The return is the difference between the initial price and the final price. Only 50% of this return can be taxed. The taxed portion is very important to look into since that will determine your true profits in any investments.
Even though there are many aspects to investments in general we covered a few important ones that any investor should know about. It is essential that one understands the objective of their investments, one needs to have a general plan before making an investment of any kind. Ask yourself are you willing to take risks for better returns? Or is your current investment doing what you require it to do? Is your earned money being lost due to inflation? It is always important to be prepared and armed with the proper knowledge regarding your investment.