Investing Finance

By: EconomyWatch   Date: 23 November 2010

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It is virtually impossible for a person to achieve his/her financial goals without creating an alternate source of income. Thisis where investing finance, which involves making investments in the financial markets, comes to our aid. Investing finance involves recognizing the various financial avenues for earning returns and making informed decisions related to risk-reward trade-offs.

The best way to ensure that you achieve your financial goals is to spread your money across a wide range of asset classes. A diversified investment portfolio not only supports healthy profits, but also reduces the risk profile.

Investing Finance: Avenues

Investing finance offers the following avenues for short-term, medium-term and long-term investments:

Financial Securities: These investment instruments are freely tradable and negotiable. The most common financial securitiesare equities and bonds.

  • Equities: Investment in equities (or stocks) gives the investor a share in the ownership of a company. Stock market trading is typically riskier and more lucrative than other investment options. Stockholders earn dividends (or a share of the profits ofthe company) while they hold the shares and can sell them in the stock market for a profit.

  • Bonds: Bondholders receive interest payments at regular intervals. They usually purchase bonds at a discount and are entitledto receiving the full face value of the bond on maturity. Additionally, some bonds, such as government or municipality bonds, offer substantial tax benefits.

Other investment instruments in this category include savings certificates, gilt-edged securities and money market securities.

Non-Securitized Financial Securities: These investment instruments are neither tradable nor negotiable. They include company fixed deposits, provident fund schemes, national savings schemes and life insurance.

Mutual Funds: Mutual funds collect funds from individual and corporate investors and spread them across various investmentoptions. These funds are managed by professional money managers. This option is considered the easiest and least stressful way to invest and benefit from the financial markets. Mutual fund schemes may be growth (or equity) oriented, income (or debt) oriented or balanced (or having almost equal proportion of equity and debt).

Real Assets: This represents physical investments and may include real estate, precious metals (like gold and silver), precious stones, rare coins and art objects.

Investing Finance: Drawbacks

Investing finance involves some inherent risks:

  • Investors can make losses on fluctuations in market trends.

  • Loss of value can also result from inflation.

  • Investors face the risk of default if the borrower declares bankruptcy.

Investing Finance: Borrowing Money on Margin for Equity Trading

When an investor borrows money from a broker, it is called borrowing on margin. Buying stocks on margin gives the investor the opportunity to buy a larger number of shares than he can currently afford. Thus the investor’s exposure to stock marketopportunities is magnified with margin trading. Although buying on margin can result in considerable profits, the risk of losingmore money can not be ignored. Besides, borrowing on margin involves brokerage cost, which may vary among firms.


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