Knowing Your Investment Options: A Brief Rundown of Five Essential Instruments

A large number of people look to investing as a means to supplement their income or increase their wealth. The markets seem to offer dazzling opportunities for profit, and although the risks are undeniable, those who can stomach the risk are often drawn in.

One of the most common misconceptions that laymen have about investing is that it simply refers to stocks, but the term covers a wide array of markets. These are incredibly diverse, and can cover everything from gold to property to currencies.

If you’re tempted to give trading a go yourself, then you need to know your options. To help you out, here are some that you might like to consider…

#1: Bonds

In order to decide where best to invest your money, you need the knowledge to assess which investment vehicles will be most capable of helping to achieve your goals. One option that you might like to consider is bonds.

Knowing Your Investment Options: A Brief Rundown of Five Essential Instruments
Knowing Your Investment Options: A Brief Rundown of Five Essential Instruments

The term ‘bond’ refers to a security that is founded on a debt. In purchasing one, you are essentially lending money to a company or government, and in return for this service, they’re agreeing to give you interest on your capital, with the eventual aim of returning it to you in full, with a little extra on top.

Bonds are often beloved of novice investors and the risk averse, the reason for this being simple: they are safe (or as safe as an investment can ever be). Provided that you are buying from a stable entity, such as a first-world government, your investment carries only the most minimal risk to your finances. The downside of this is that returns will also be limited, and that you’ll usually receive a lower rate than other securities would deliver.

#2: Stocks

Stocks are perhaps the most well-known investment instruments, and most people are familiar with how they work: you purchase them, and in doing so, you become the part owner of a business. This newly acquired position imbues you with both the power to vote at shareholders’ meetings, and an entitlement to profits known as dividends.

As a rule, stocks are far more volatile than bonds. It is common for them to fluctuate daily, and when you purchase them, there is no guarantee that you will profit from your investment. Indeed, in many cases, you will only make money if your stock sees an increase in value, which means that there is an undeniable risk of loss for you as an investor.

The upside to this is the potential for profits. Although bonds are very limited in how much they will give back to you, stocks are not, and it is possible to increase your wealth by a marked degree if all goes to plan and your assets thrive.

#3: Mutual Funds

Mutual funds work a little differently. As a rule, they are a collection of stocks and bonds, purchased by a number of investors as part of a shared endeavor. A professional manager is in charge of selecting the specific assets, and will do this with your investment goals in mind.

The greatest advantage offered by mutual funds is that you can trade in a professional manner. Although you may lack the individual time, skills, and experience to make sound investments, you can tap into somebody else’s expertise in order to further your ambitions. Usually, this enables investors to make a far greater return than they would trading as an individual, which makes mutual funds well worth considering.

#4: Options

Options are complex investment instruments, and should only be considered by those with some experience of the financial markets. High risk, high reward securities, they offer the chance for dazzling profits, alongside the potential for devastating losses. In order to trade them successfully, you’ll require some very specialized knowledge, and it’s important to consider this before you add them to your portfolio.

Options are contradictory, in the sense that some people find the concept incredibly simple to grasp, while others simply cannot wrap their minds around it. Essentially, they are a contract, and they bestow upon their buyers the right to buy or sell an underlying asset at a set price and within a set period of time.

The appeal of options usually lies in their versatility. They can be used in two main ways, to speculate and to hedge, and this means that investors can take advantage of any situation that arises. They are a sword and a shield in one, ideal for both stealing the advantage and protecting against downturns.

Although they have their uses, however, they are not without their risks, and almost all brokers will offer them with a disclaimer warning of this. This means that although they can be incredibly handy, they should only ever be used by those with experience and an in-depth understanding of them.

#5: Forex

The foreign exchange markets are some of the most active and heavily traded in the world. Even those who have never considered investing are likely to have exchanged currencies at some point in their lives, and this means that most of us have a basic understanding of how they work.

Perhaps this is the reason why the markets have seen such a surge in recent years: because currency trading is familiar to all of us. Although it was once the reserve of only the largest financial institutions and the wealthiest of individuals, the foreign exchange is now open to everyone, and people have been quick to take advantage of the opportunities it presents.

Known to be an exciting venture, it lures traders over and over again, and can deliver staggering profits for those bold enough to use leverage. Yet it is not a game for the faint of heart. The potential for wealth goes hand-in-hand with the danger of losses, and a great deal of skill and experience is required to take advantage of the former and avoid the latter. Skilfully traded, the exchange is a revelation; poorly traded, it is a disaster.

Which assets will you add to your portfolio?

( Photo by free pictures of money )

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