If you want to start investing you will find many options to choose from. But how do you know whether you should invest in bonds, stocks, real estate or a combination of all? Are mutual funds a good option? How should you invest in a particular security? In short, where do you start? Here’s a quick guide that should help you make up your mind.
The Different Aspects To Consider
As an investor, you will probably have 3 main concerns – safety, growth and income. Let’s take a look at the safety aspect of investments.
There is probably no investment that is 100% safe. Government issued securities and corporate bonds issued by well established and highly reputable companies are probably your best bet for safe investments. You can preserve your principal and receive a fixed rate of return. Other securities such as Treasury bills, Certificates of Deposit (CD), commercial paper or banker’s acceptance slips are safe investments in the money market. In the fixed income, or bond, market, you can invest in municipal and other government bonds and, as mentioned earlier, corporate bonds. The latter have a slightly higher level of risk than Treasury bills or CD’s. But corporate bonds also have a higher level of yield.
The bond market has a wide variety of securities that you can invest in and they also have varying level of risk. So, on one hand, you have safe government bonds and on the other end of the spectrum you have “junk bonds” which are quite risky. If you decide to invest in bonds, make sure they have a high credit rating.
When you sell a security at a higher price than the price it was bought at you make a capital gain. If you’ve sold it at a price lower than the purchase price, you have a capital loss. Some people invest so that they always have a fixed source of return. Others invest for long term capital growth. If you want the latter, then investing in common stock is a good idea. These are securities that have relatively low yields but high growth opportunities. They are considered to be the most speculative of all investments because you can never predict how the market will turn. Blue chip stocks, on the other hand, are quite safe, give good returns and also have growth opportunities that depend on corporate revenues over the long term. Capital gains also have low tax rates in most states. This is because, by investing in common stock, you are investing in small companies which are very important for the overall growth of the economy.
The last important aspect of any investment plan is income. As you must have realized by now, income and safety do not always go hand in hand. If you want safety, you have to sacrifice on yields. If you want high yields, you have to sacrifice on safety. The best thing for you would be to allocate your assets. For example, you could invest a portion of your money into stocks and a portion of your money in bonds. In this way, you are cushioned from the effects of a fall in the stock market by the returns you receive from bonds.
Your investment decisions should be based on your objectives and the time frames you want to accomplish them in. For example, if you are about to retire or have already retired, then you probably want a certain amount of money every month. In this case, it is best if you invest in relatively safe assets such as pension plans. But if you are still young and have many years of work life ahead, then you can afford to take a few risks.