The word “invest” means to put money to use, by spending or acquisition, in something offering possible lucrative returns, such as income, interest or appreciation in value. Residential real estate is one of the commonest forms of investment since it includes property purchased as a primary residence.
For people interested in investing funds, experts recommend reading up on different investment vehicles such as stocks, mutual funds and real estate, and taking a class or two if possible. Once the would-be investor develops a basic knowledge of the types of investment available, he or she can develop financial goals and come up with a strategy.
The objective is the same whether an investor has $20 or $200,000 to invest: people invest in order to make their money grow. Before investing, it makes sense to pay off high interest debt such as credit cards, since the expected returns (usually less than 10 percent) will be less than what is paid out in interest, which in some cases can be as high as 24%. It’s also a good idea to focus on putting aside an emergency fund. Once this is in place, allocate a monthly investment budget, and put your strategy in action.
Investing is related to saving or postponing consumption. To avoid speculating or gambling, funds invested should be backed by proper collateral or insured by assets. To minimise risk, experts recommend diversifying investments, that is, investing in different asset classes such as stocks, bonds, private equity and commodities.
It is possible to invest very small amounts, such as $100, or even $20 in the stock market. Is it worth it to invest such a pittance? Amazingly, yes it is. Small sums of money can be invested cheaply in a vehicle known as Dividend Reinvestment Plans, offered by more than one thousand major corporations. These plans are one of the safest, steadiest ways to build wealth over a lifetime.
According to the Wall Street Journal of June 18, 1991, not following a strategy while building a portfolio is one of the commonest investment errors, followed by purchasing too many mutual funds. Other sins included not researching one-product stocks before purchasing, trying to time the market, taking profits too early and not cutting losses. The number one mistake, according to the journal, is buying the “hot stock” that you got from a tip, officially known as “extrapolating the trend.”
Whatever you choose to invest in, you should try to ‘buy low,’ that is, purchase when the asset is cheap. For investing in the long term, a buy and hold strategy often works well, since it gives you a chance to compound gains such as interest, dividends and rental income. However, if you must sell the asset, try to do so when the price is high, so you can maximise your capital gains.