At times, the extra money you earn can go to a savings account that pays you minimal annual interest, or to a special fund you keep for emergency, travel or medical purposes. But if you want to grow your surplus more than what the banks are offering, then you could give investing a chance. By subscribing to an investment plan, you can easily put in your money, monitor performance through your smartphone and quickly earn without breaking a sweat.
What is an investment?
When you make an investment, you are essentially putting your money into an existing business with the goal of generating a profit in return. Think of it as buying a chicken that hatches eggs that turn into more chickens. The animal is your initial investment and the eggs are your profit. The more eggs it lays, the more poultry you can sell.
The thing with investing is you don’t have to build your own business from scratch. Instead, you just have to commit your money to companies that are already thriving and to the federal government. If the business nets an income, then you get a share through dividends or capital appreciation. If not, your investment devalues, but you can wait until it bounces back and still get your money back.
Just like any undertaking, investing involves risks that can affect the monetary value of your investment and the returns or losses you will reap. One risk is the market risk which pertains to the decline in value of money due to economic conditions such as movement of exchange rates and drops in the market value of shares traded on the stock exchange. Others include inflation, changes in interest rates, and credit risk.
With all the risks you are exposed to, you need to gauge to what extent you are comfortable taking the risks. Are you the conservative type that wants to ensure only small, positive returns and minimal losses? Or, are you an aggressive investor that can accept a steep fall in the hopes of gaining big time? The answer depends on you, your financial goals and your purpose in investing.
Types of Investments
There is a number of investment options where you can start your money low, continue to grow and eventually retire at a premium. The key to success in investing is to understand how each type works. Here is a list of options you can choose from and basic information about each type.
Stocks or Equities
There is a chance in the world that you can own stocks of a multinational conglomerate or a Fortune 500 company by buying from your chosen publicly listed entities. Whether you’re a lawyer at www.seattlemalpracticelawyers.com or a cashier at the mall, you can buy stocks and become a part owner of your preferred company. Purchasing equities can be easily done either during an initial public offering (IPO) or afterwards by opening an account with a brokerage firm. With today’s technology, you can also do it through an app or via a browser in just a few minutes.
Stocks are the most volatile type of investments, and prices can dip any second and then soar high in a minute. The market value of your shares will fluctuate over time depending on the business performance, the entity’s reputation including stories about it, the country’s economy and the state of the stock exchange. Unless you sell your shares, gains or losses will reflect in your portfolio but it will not determine how much you are going to make.
When it comes to stock investing, you can choose either to do active trading or to hold your investments for a year or more. With day trading, you have to keep track of stock movements, calculate gains less transaction costs and decide wisely when to hit the sell button. If you don’t have time for this, then just stick around, hold your horses and sell your shares at maximum benefit over time. Lastly, you can buy a number of different stocks, let them sleep over the years and sell them upon your retirement.
If stocks are equity securities, bonds are considered debt securities because of the debt feature of the investment. A bond is a loan to a corporation or the government with regular interest payments over the term of the bond and full repayment of the principal amount upon maturity. Choice of funds to invest into include corporate bonds, treasury bills or securities and market bonds. Most bonds are issued because companies are aiming for massive expansion.
Bonds are issued in a lump sum and the minimum amount depends on the issuer. The investment is to be held until the maturity of the bond but a pre-termination is possible by paying penalties and other transaction costs. Also, early withdrawals might not guarantee that you get the principal amount depending on the terms of the investment policy.
Unit trusts or funds
A unit trust or fund is a collective investment plan where money is pooled from various investors and invested into a diversified portfolio of assets according to the fund’s investment approach. It is managed by an expert investment team according to the fund’s objective to maximize returns at acceptable risk levels.
Investing in this type of investment can be done by buying the required minimum units in the fund. Unlike stocks wherein market values are actively traded, a unit trust’s price is based on the net asset value per unit (NAVPU) which is the fund’s net asset value divided by the outstanding number of units. Essentially, the NAVPU is the fair market value of the fund’s net assets. Gains or losses pertain to the daily price movements of the NAVPU. Also, you can earn passive income when the fund declares and pays dividends.
When you’re playing games, you get to amass money, gold coins or any type of currency that you can use to purchase items, upgrade characters and even build your own kingdom. You can’t cash it out to your bank account but you surely can use it to play your game.
The same concept goes for cryptocurrency. It is a digital currency that can be used to process certain financial transactions, built with cryptographic protocols over the Internet and, most importantly, real money with a market where it is actively traded and exchanged. Unlike regular paper bills and coins, cryptocurrency is not controlled by a central bank or the government.
It is highly technical to understand the birth of this new currency, how it works and how transfers happen. Nonetheless, they already exist and everyone has the opportunity to earn passive income out of it. Like any investment, you need to set up an account with a verified platform where you can create your portfolio and trade cryptocurrencies like Bitcoin, XRP and Ethereum. As a caveat, only subscribe to secure mobile wallets that can protect your money from potential hacking.
If you want a more straightforward approach to investing, perhaps you’d be interested in peer-to-peer (P2P) lending. It is an alternative source of financing whereby potential borrowers are matched with willing lenders through online platforms. Like cryptocurrency which lacks a central authority, P2P lending does not need a financial institution. And because transactions go through online channels, most loans are unsecured, take only a day or less to finalize and pre-determine returns for lenders.
It is up to you what you want to do with the extra cash you have. You can have it sleeping in a bank, build your own business, buy a home or try investing. The financial market is replete with great options where you can grow your money with a quick swipe of your finger. Get to know what interests you, understand how it works and start earning by your rules.