What is Investing? How Do I Invest?
Investing refers to buying assets with the intention of eventually making a profit or earning some sort of income from these assets. To invest properly means that you are planning ahead and putting your money to work for you. This planning stage is generally referred to as an entry into the market. Therefore, it goes without saying that to truly understand the process of investing you have to first understand what investing actually is.
When people refer to investing, they generally mean both individual investments and whole account investments. Individual investments can be made in any financial instrument, such as bonds, stocks, mutual funds, and even bonds (specifically those having reinvestment rights). The most common types of individual investments are ones in bonds, where the borrower is given the right to sell his bonds at some point in the future for an amount of money that exactly equals the amount of money that was lent to him at the time of purchase. For instance, if you borrow money to invest in a bond, you are then lending money to yourself.
Another type of investing is in collective investment funds. In a collective investment fund, a set number of different assets are pooled together and invested in various ways in order to create a portfolio that will have a higher overall return than the returns of the individual components of the fund. For example, one group of people who invest in bonds may do so in order to obtain better rates on their investments, another group of people may opt to invest in emerging markets where the currencies are cheaper in order to obtain a larger return on their investments. Finally, there are investors who may decide to invest in asset categories that have a longer time horizon, but provide higher rates of return over a shorter period of time, such as the energy sectors.
The term “investing” can also mean different things to different people. For instance, some people consider all types of investing, including short-term stock and bond investments, as part of their overall portfolio. Others prefer to focus on one or two investment types, such as real estate and the commodity markets. Still others view these types of investments as short-term solutions to their problems and therefore do not pay attention to the overall investment landscape.
Investing is really about risk management. Diversification is the process of spreading your risk between different investment opportunities. For example, a good way to diversify your portfolio is to buy insurance that covers both automobile and homeowner insurance from one company. When purchasing insurance, make sure that it covers all the aspects of your life that you want covered, like home insurance, auto insurance, and life insurance. If you want to minimize your risk in any one area, do so by purchasing insurance from a single provider with a large variety of products. The more diverse your portfolio, the less prone to risk you are.
Investing is all about risk management and diversification. You should not choose an investment solely on its attractiveness or how much it seems to be growing. An important part of investing is understanding your individual risk profile and being able to anticipate when it might go south. By diversifying your investments and keeping an eye on your cash flow, you will find that you are more likely to have steady growth in your portfolio.