Basic investment options

There are many ways to invest your money, and people have many investment options. Of course, to decide which investment vehicles are suitable for you, you need to know their characteristics and why they may be suitable for a particular investing objective. Here we introduce the basic ones.

Bonds

Grouped under the general category called fixed-income securities, the term bond is commonly used to refer to any securities that are founded on debt. When you purchase a bond, you are lending out your money to a company or government. In return, they agree to give you interest on your money and eventually pay you back the amount you lent out.

The main attraction of bonds is their relative safety. If you are buying bonds from a stable government, your investment is virtually guaranteed, or risk-free. The safety and stability, however, come at a cost. Because there is little risk, there is little potential return. As a result, the rate of return on bonds is generally lower than other securities.

Stocks

When you purchase stocks, or equities, as your advisor might put it, you become a part owner of the business. This entitles you to vote at the shareholders' meeting and allows you to receive any profits that the company allocates to its owners. These profits are referred to as dividends.

While bonds provide a steady stream of income, stocks are volatile. That is, they fluctuate in value on a daily basis. When you buy a stock, you aren't guaranteed anything. Many stocks don't even pay dividends, in which case, the only way that you can make money is if the stock increases in value - which might not happen.

Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment.

Mutual Funds

A mutual fund is a collection of stocks and bonds. When you buy a mutual fund, you are pooling your money with a number of other investors, which enables you (as part of a group) to pay a professional manager to select specific securities for you. Mutual funds are all set up with a specific strategy in mind, and their distinct focus can be nearly anything: large stocks, small stocks, bonds from governments, bonds from companies, stocks and bonds, stocks in certain industries, stocks in certain countries, etc.

The primary advantage of a mutual fund is that you can invest your money without the time or the experience that are often needed to choose a sound investment. Theoretically, you should get a better return by giving your money to a professional than you would if you were to choose investments yourself. In reality, there are some aspects about mutual funds that you should be aware of before choosing them, but we won't discuss them here.

Alternative Investments: Options, Futures, FOREX, Gold, Real Estate, Etc.

So, you now know about the two basic securities: equity and debt, better known as stocks and bonds. While many (if not most) investments fall into one of these two categories, there are numerous alternative vehicles, which represent the most complicated types of securities and investing strategies.

The good news is that you probably don't need to worry about alternative investments at the start of your investing career. They are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Yes, there is the opportunity for big profits, but they require some specialized knowledge. So if you don't know what you are doing, you could get yourself into a lot of trouble. Experts and professionals generally agree that new investors should focus on building a financial foundation before speculating.

How to Choose an Investment

We have lots of investment options, which one is the best? Not the most highly benefited one, but the most suitable one. Remember, when you choose to invest your money, the final decision is yours alone. The risk of the investment is also yours.

Before you invest, consider your complete financial situation, looking at both your current and future needs. In general, investors should avoid higher-risk investments unless they have a steady income, adequate insurance, and readily available cash reserves in case of a loss. There are three investment basics

Rule One:
No matter how you choose to invest your money, there will always be a degree of risk involved.

Rule Two:
Risk and return go hand-in-hand. Higher returns mean greater risk, while lower returns promise greater safety.

Rule Three:
Do not invest in anything you do not fully understand.


Setting your investment goals

Ask yourself, “What do I want to accomplish through my investments?” For most investors, the following investment goals or objectives, or some combination of these, provide an initial answer to that question:

Safety
This objective reflects a conservative investment philosophy with minimal risk of loss of the original investment (the “principal”).

Income
An “income” objective is achieved by purchasing investments that provide a stream of income through regular payments, which may or may not decrease the invested principal.

Growth
This category refers to investing for long-term growth or appreciation in market value. Growth investments carry a higher risk than either safety- or income-oriented investments. Growth investments generally provide little or no dividend income.

Speculation
Speculative investments carry a higher-than-average possibility of loss. This strategy often includes short-term trading of new or unproven companies’ stocks or options. Although there is the possibility of higher and faster rewards, speculative investments also are high-risk, meaning there is also the possibility of larger and faster losses of some of, or your entire principal.


Balancing “risk” and “return” to meet your goals

As an investor, you choose your investment goals with an emphasis on one or more of the above categories. You may also wish to allocate portions of your investment portfolio to more accurately express your investment goals.

For example, if you have $10,000 to invest, you may choose to invest 70 percent ($7,000) in income securities, 20 percent ($2,000) in growth securities, and 10 percent ($1,000) in speculative securities.

Of course, setting a goal and reaching it are two very different things. You may need professional assistance to realize your investment goals and to achieve your financial objectives.

If you choose to work with a broker, communicate your investment goals and financial objectives clearly. Put it in writing and keep a copy for your own records.

Remember, the more money you want to make from your investment, the more risk you must be willing to take. Risk means that you may lose all or part of your principal. If a high level of risk makes you uncomfortable, select your investments accordingly.


Get more information

There are many sources of information about a company in which you are interested in investing. If you do not know where to look, start by contacting the Texas State Securities Board. In most cases, securities must be registered with the securities regulator in each state where they are sold. Information about the company may be available to the public. You should also ask your brokerage firm or investment adviser to assist you in gathering information about the company in which you may invest.

Pay close attention to business and financial newspapers in your area. Often, these periodicals provide in-depth coverage about a specific company or segment of the industry. Check with your local reference librarian for assistance in identifying appropriate investment-related materials.


Things to consider

U. S. Treasury Bills (“T-bills”) are the benchmark of minimal-risk investments. If an investment is presented as a very low-risk, it should produce a rate of return similar to the rates paid on T-bills.

If anyone guarantees your investment against loss, you should immediately contact the Texas State Securities Board, Enforcement Division.

Additional Considerations

Always set aside some of your money for emergencies before you invest.
Ask for advice from a trained and licensed professional.
Be selective in your investment choices. Exercise your right to say “No.”
Develop a sensible investment plan and follow it.
Judge each company on its own merits. Do not invest in a company just because it is part of a fast-growing and successful industry.
Never invest based on information obtained from an unsolicited telephone call.
Check the credentials of anyone you do not know who offers to sell you an investment.