According to the American Heritage Dictionary, ‘invest’ is a verb meaning to give capital or money to an individual or a corporation in order to achieve a financial return, as in “she invested her savings in stocks and real estate.”
As the global economy continues to be sluggish, many people are wondering how to invest their scarce resources. Key strategies include taking diversified positions and minimising costs such as fees and taxes. According to a study done by the Schwab Centre for Financial Research, investors in the higher tax brackets lost, on average, 2.4% of their investment in domestic equity mutual funds every year over a twenty-year period. You will also need an investment plan that will keep you focused, so you don’t panic when markets begin to dislocate, which they will.
The first part of your plan will involve saving at least six months of living expenses in an emergency fund in case you lose your job. You will also need a basic understanding of the different types of investment, so you will know which ones are right for you. Practice trading your investments on paper before actually doing it with real money. When you feel comfortable enough that your strategy is in place, you can take action: open a brokerage account, start looking for houses to buy etc.
Motley Fool calls this the eighth wonder of the world, and Albert Einstein said it is the greatest mathematical discovery of all time. What is this deceptively simple formula they’re singing the praises of? Your money x (1+I)^n, or the calculation for compound interest. Simply put, it’s the amount of money you invest multiplied by the rate of return you get plus one, with ‘n’ being the amount of time you have to make your money grow. Any time you’re wondering how to invest, keep this formula in mind to calculate your expected returns over time.
Now that you know how to invest using the compound interest calculator, you can look at different types of investment. Stocks are very popular, and they give you part ownership in a company. Many people also buy shares in mutual funds, where they pool their money with that of other investors. These funds are then invested in vehicles such as money market accounts, stocks, bonds, currencies, futures, and even other mutual funds.
You can also purchase government bonds and treasury bills, which in essence is lending money to your government. There are many more investment vehicles to choose from: real estate, futures, foreign exchange just to name a few. It’s important to be comfortable with the investment vehicles you choose, so you should research and do your due diligence before investing in anything.
Before investing in a company, there are three statements you need to look at: the balance sheet, the income statement and the cash flow statement. When researching the company, you also need to look at its proxy statement, its most recent annual report and statisticals going back five to ten years. These documents will put you in a much better position to decide whether or not a particular investment will be a good one.