Understanding Investments: A Beginner’s Guide

Anyone can be an investor. The higher returns coupled with the unpredictability and volatile nature of the financial markets is well- known, making the markets equally intimidating as it is intriguing. Understanding the market can bring a measure of balance to the chaos and potentially lead to favorable outcomes and returns. By the end of this article, you will have a better understanding of the financial market and hopefully a place to start on your own investing journey.

At its heart, investing is putting money (or capital) into an asset or entity (like a company share) with the intent to make a profit. The entity uses your invested money to finance its activities to generate income which is shared with you via income or an increase in value. While investing offers great opportunities to generate wealth, the accompanying risk requires skillful navigation to balance the risk/ reward relationship. Add in the myriad of investment options available in the market coupled with the need for a unique solution for your own specific investment goals, whether it be retirement, education or home ownership - and the process can get daunting, quickly. Let us keep it simple and focus on the three most common instruments which should be present in your portfolio, and probably make up most of your portfolio - bonds, stocks and mutual funds.

Bonds offer fixed and stable income as the issuer is required to make scheduled interest and principal payments similar to you providing a loan to the issuer. When investing in bonds the primary risk you must consider is credit risk - the risk that the issuer will not be able to make payments according to the agreed terms. Continuous monitoring of the issuer’s financial position and performance can provide you with insights on the issuer’s ability to meet their debts when they fall due.

Investing in stocks offers variable income that is dependent on the performance of the company. A stock is an ownership stake in the issuing company.

Choosing the right company to invest in, is an interesting and enlightening process that entails understanding the company’s value proposition. This includes how the company is performing, its industry position, its competitive position and opportunities for its growth. Choosing the right stock can offer you significant returns. However, bear in mind that those returns are not guaranteed.

Lastly, mutual funds offer you the opportunity to seamlessly purchase an all-in-one solution which is managed by a professional investment firm. Since mutual funds pool money from multiple investors, it means that you now have access to instruments you would not have been able to acquire on your own. Anyone can be an investor. What will distinguish you is how strategic and well informed you are; your understanding or your risk tolerance and how this all fits into your investment goals. Whether you are investing in bonds, stocks or mutual funds, before making any investment decision, ensure that you appreciate that reward is always accompanied with risks in the market.