The key point of investing funds is minimizing risks and getting income. To know more, it is important to distinguish between different processes investment comprises.
We begin with the simplest terms, yet most likely unknown for the majority of the readers, winding up with the most optimal for managing funds forming investment portfolios.
Long-term management of funds is a key point of the article. If you try to get 100% at your investments monthly – you are not the very person to read it. The article is inclined to grasp the attention of potential investors tending to minimize risks within saving funds for many years ahead, instead of short-term 6-12 months.
Terms saving and investing are typically considered to be synonymic while meaning completely different approaches in the respect of funds management as time and risks degree play the leading role.
Saving means short-term accumulation of funds in banks’ saving accounts (bank deposit) used for paying-off unexpected expenses or an accumulation of funds in some secure place. It gives the opportunity to guarantee funds from bankruptcy and other market risks, despite of having low return index and being rather symbolic.
Investing is both connected with high return index and greater risks. It generally means purchase/sale of shares, bonds etc., and normally is a long-term process. World markets are crowded by lots of new participants coming every year and making attempts to make money with assets allocated most optimally. Despite of risks, financial market instruments return is much higher than the one of funds in saving accounts.
Accumulation is a way of investing aimed at monthly investment funds accumulating. An investor transfers certain amount of money taken from his/her wages to an account monthly. This allows saving considerable amount of money till old as the money is being invested into market instruments. As a rule, pensionary and depository plans are of several types; they allow investors to transfer money in CD accounts in different ways.
Minor investors attempt to combine these three notions in funds management. Their money, received as wages and transferred for certain goods and services, are in a bank being insured from losses and unforeseen consequence. Far ahead, these funds work as investing instrument. Residents’ shares, which they receive as higher productivity motivation, are ruled by well-trained managers in investment companies, where, aside of managing these shares, resident can use a different sort of instruments to manage his/her available funds. Thanks to such combination one is definitely sure in his/her funds being secure. Moreover, he/she can save money for upbringing children, house, vacations, luxury etc.
We won’t touch upon an aspect of bank deposit and accumulating funds in bank accounts here, directly turning to the investing issue. Having opened an account in an investment company as a minor investor you can use all three tendencies at the same time. You could whether allocate your funds in a bank for a minimal return (saving) or you could invest your money into market instruments (investing); the third way is to accumulate it in the CD accounts for further investing (accumulating). The question: “Which investment company open account in?” is not an essential thing in our article as it requires personal decision only. The most important for an investment company is to specialize in as many financial instruments as possible, and as its client you are the one to be given the biggest number of financial options.
When managing our investment portfolio we will take into account three main options: stock market, money market and derivatives.
We begin with the most significant option – management of a part of a portfolio, which consists of stock market instruments.
Stock market is one of the oldest financial markets in the world, its history goes back to several centuries ago time. Today, U.S. stock market is definitely one of the most interesting and liberal markets of the world; it comprises both major market players and ordinary U.S. citizens. Auction regulations are set by Securities and Exchange Commission (SEC) and the Federal Open Market Committee (FOMC).
Major instruments used by sellers in stock market are: shares and bonds.
Shares are the securities issued by stock corporations; shareholders enjoy all property and personal rights connected with shareholding:
– right to receive dividends up to the corporation revenue;
– right to participate in running corporation by means of voting process;
– right to get property share after the liquidation of the corporation.
Rights are fulfilled proportionally to shares’ value.
Types of shares
There are several types of shares.
Ordinary shares. These are the shares giving rights for corporation property. Shareholders have the right to elect Council of Directors and influence key issues; take part in corporation revenue (as dividends), take part in assets of a corporation in case of its liquidation on residual powers (after all debts have been paid and all preference shareholders get their shares).
Preference shares. These are the shares giving the right to have some privileges against ordinary shareholders. They can lie in:
– getting fixed guaranteed dividend;
– primary getting rest of corporation property in case of its liquidation; having privilege in share buy-out made by issuer etc.
– Its holder usually has no right to participate in running the company by means of voting.
Shareholders should realize risks connected with the activity of the corporation. If business slows down, shares price goes down as well; in case of corporation bankruptcy its shares can totally fall in value. In case the company is financially experienced and its managers run business professionally, then shares value grows constantly making shareholders more and more prosperous. Shares’ average annual return was up to 12-16 per cent within recent years.
Today, bonds are the most reliable financial instruments with minimal risks. If you possess bonds, your funds are more protected and allow an investor to overcome inflation as he/she gets dividends. Bonds’ return is traditionally lower as compared with the shares and is entirely diversified.
Bonds are the securities (promissory notes), due to which its issuer binds itself to pay fixed capital to a shareholder in a certain moment in future or pay revenue with rate fixed beforehand as a certain per cent to the nominal cost of a bond (unlike depended-upon-company revenue shares). If a bond is sold at a lower-than-nominal price, its return forms mentioned price ratio and is called a discount. Bonds’ return can also be paid by means of coupons payment. State, municipalities and private corporations can be the issuers of bonds. Bonds with 5-year maturity date are short-term; with 6 to 15-year maturity date are mid-term; with 15 and up year maturity date are long-term. Bonds are bought and sold within the market price up to their return, loan interest, demand and supply. Bond’s cost is usually about $1000.
Types of bonds
According to the issuer bonds can be of several types.
U.S. Treasury bonds. Their maturity date is between 3 months and 30 years. They are sold by the U.S. Treasury. These bonds are of minimum risks since are guaranteed by the government. Their rates are tax-exempt.
State agencies bonds. Some state agencies issue bonds to finance special tasks. These bonds are also guaranteed by state. These are such agencies as the Federal National Mortgage Association (Fannie Mae), the Federal
Home Loan Mortgage Corporation (Freddie Mac) and the Government National Mortgage Association (Ginnie Mae).
Corporate bonds. Along with shares corporations often issue bonds. Corporate bonds usually possess higher rate as compared with the treasury ones, though risks are also higher as a company can go bankrupt and have no chance to pay off debts. As for the state, it can easily issue more money anytime. There are also so called “knock-down bonds” with very low credit rating, but very high return.
Bonds’ average annual return was about 5 to 9 per cent in recent years.