Investing is complex and can be risky, so it’s wise to talk to an accredited financial advisor first. However, here are a few concepts to familiarise yourself with before you start.
(Please note that this information does not constitute financial advice and is not to be acted on as such.)
Risk and return
Investing is a means of growing wealth that involves putting money into an investment in the hope of getting more money out later.
All investment involves some level of risk that you will lose money instead of gaining more, and there is generally no guarantee of ‘return’ (the money you get out of it in the end). When an investment offers a high chance of making a lot of money, there will also be a high risk of losing a lot of money. So, if someone offers you an investment with low risk and high return, you should be instantly suspicious.
Types of investments
The various types of investment carry different amounts of risk. Here are some of the types of investment:
- Equities / shares / stocks: All three words are used to describe the same thing – a small portion that you own of a large company, and their value increases or declines depending on how well the company is doing. Shares can also be traded on the stock market. Stocks are generally the most risky form of investment.
- Bonds: When you buy a bond, you are loaning money to the bond issuer (the government or a company) and receive an annual interest payout.
- Property: Apart from buying your own property, you can also invest in property, for example through a Real Estate Investment Trust on the stock exchange.
- Cash: This includes fixed deposits and money market accounts. This type of investment is generally the least risky, however the returns may not be high enough to beat inflation.
- Unit trusts: This is a fund that is invested in a range of the above asset types, managed by a fund manager.
The saying ‘Don’t put all your eggs in one basket’ is particularly relevant when it comes to investment choices. Investing in a range of assets and asset types can help to reduce your risk because they will be affected differently by changes in the market. This can help to buffer your possible losses while also including some riskier investments with higher returns.
Seek professional help
As previously mentioned, there are a lot of factors to weigh up with choosing a wise investment for your hard-earned money, and it is wise to get professional guidance from a financial advisor before making any decisions.