November 23, 2010Investingby EconomyWatch

Investing 101, Investing Basics, Beginners Guide, Dummies Guide to Investing

 

 

This investing 101 guide gives a brief overview of the world of investing, providing a basic understanding of the variousinvestment vehicles, strategies, risks and returns. It serves as a beginners guide to investing that lays the foundation for a further understanding of the intricacies of investment strategies.

Investing 101: What is Investing?

Investing is the allocation of money across different investment vehicles with an aim to growing the funds. The invested funds, however, are exposed to several risks. Hence, investors undertake a detailed analysis of different instruments to identify the ones with the most appropriate risk-return trade-off.

Investing 101: Investment Types

The various investment vehicles can be categorized as follows:

  • Bonds: These fixed-income securities are based on debt. Whenever an investor purchases a bond, he lends money to the issuing authority. In return, he receives regular interest payments and the complete face value of the bond on maturity. Bonds are safer than most other investment options. However, this low risk is offered at the cost of a low rate of return.
  • Stocks: When an investor buys shares or equities, he becomes an owner of a part of the company that has issued the stock. This entitles the stockholder to vote at shareholders’ meetings and receive profits in the form of dividends. Stocks have high potential for capital appreciation, but are prone to market volatility.
  • Mutual Funds: Funds allow investors to gain exposure to a collection of stocks and bonds. A typical mutual fund pools in money from different investors and a professional manager invests the same across various instruments. Hence, it minimizes the element of risk and allows investors to benefit from the professional management of their money.
  • Other investment vehicles, such as futures and options, foreign exchange, gold and real estate are high risk options. One requires prior knowledge to invest in these instruments, which are impacted by speculation investing.

Investing 101: Active and Passive Strategies

Investors can opt for an active or a passive investment strategy. Active investors, such as brokers and fund managers, undertake systematic analysis of different investment vehicles. Passive investors put their money into funds, indexes or other instruments developed by a third party. For instance, one could choose to invest in the S&P 500 Index Fund to gain exposure to all the stocks included in the index.

While diversification is good, it is better not to dabble with a lot of instruments in your portfolio. Warren Buffett suggests the strategy of 'KISS' or 'keep it simple, stupid' for an investment portfolio. Find out more with investing for beginners.

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