Investing For Beginners

Investors and Investing.

Investors and Investing.

Investing for beginners can be a tricky enterprise. Investments7 aims to help new investors get the information they need to understand investments, find good investment targets and invest wisely for high returns. So let’s start now.

The driving force behind financial markets is the desire of investors (like you and me) to earn a return on their (and our) assets. This return has two distinct components:

  • Yield is the income the investor receives while owning an investment.
  • Capital Gains are the increases in the value of the investment itself, and are often not available to the owner until the investment is sold.

Investors’ preferences vary as to which type of return they prefer, and these preferences, in turn, will affect their investment decisions. Some financial market products are deliberately designed to off only capital gains and no yield, or visa versa, to satisfy these preferences.

There are two types of investor categories:

Individuals. Collectively, individuals own a small proportion of financial assets. Most households in the wealthier countries own some financial assets, often in the form in retirement savings or of shares in the employer of a household member.

Most such holdings, however are quite small, and their composition varies greatly from on country to another.

The great majority of individual investment is controlled by a comparatively small number of wealthy households. Nonetheless, individual investing has become increasingly popular.

Institutional Investors. Insurance companies and other institutional, including high frequency traders, are responsible for most of the trading in financial markets. The size of institutional investors varies greatly from country to country, depending on the development of collective investment vehicles. Investment practices vary widely as well.


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Markets

Financial Markets take many different forms and operate in diverse ways. But all of them, whether highly organised, like the London Stock Exchange, or highly informal, like the money changes on the street corners of some African cities, serve the same basic functions.

  • Price Setting The value of an ounce of gold or a share of stock is no more, or no less, than what someone is willing to pay to own it. Markets provide price discovery, a way to determine the relative values of different items, based upon the prices at which individuals are willing to buy and sell them.
  • Asset Valuation Market prices offer the best way to determine the value of a firm or of the firm’s assets, or property. This is important not only to those buying and selling businesses, but also regulators.
  • Arbitrage In countries with poorly developed financial markets, commodities and currencies may trade at very different prices in different locations. As traders in financial market attempt to profit from these divergences, price move towards a uniform level, making the entire economy more efficient.
  • Raising Capital Firms often require funds ti build new facilities, replace machinery or expand their business in other ways. Shares, Bonds, and other types of financial instruments make this possible. The financial markets are an important source of capital for individuals who wish to buy homes or cars, or even make credit-card purchases.
  • Commercial transactions As well as long-term capital, the financial markets provide the grease that makes many commercial transactions possible.
  • Investing The Stock, Bond and Money markets provide an opportunity to earn a return on funds that are not needed immediately, and to accumulate assets that will provide an income in the future.
  • Risk Management Futures, Options and other derivatives contracts can provide protection against many types of risk, such as the possibility that a foreign currency will lose value against the domestic currency before an export payment is received. They also enable the markets to attach a price to risk, allowing firms and individuals to trade risks so they can reduce their exposure to some while retaining exposure to others.

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What are Investments?

To invest is to allocate money in the expectation of some benefit/return in the future. In other words, to invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time. When you invest it always requires a sacrifice of some present asset that you own today such as time, money, or effort.

In finance, the benefit from an investing is when you receive a return on your investment. The return may consist of a gain or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), or investment income such as dividendsinterest, rental income etc., or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.

Investors generally expect higher returns from riskier investments. When a low-risk investment is made, the return is also generally low. Similarly, high risk comes with high returns. 

Investors, particularly novices, are often advised to adopt a particular investment strategy and diversify their portfolio. Diversification has the statistical effect of reducing overall risk.