Investing your finances-a beginner's guide

Continuing with the article on investments, I get to explore the various instruments/vehicles that one can use to achieve their financial goals, be it short term or long term. It’s important to recognize that the investment industry is constantly changing, and there will always be new products and services, therefore my listing may not be exhaustive. We will get into future articles, where I will talk about the investment methods individually. I will compare investing in a developed country, emerging markets and developing countries, precisely Africa( buts that’s for the future), lets deal with the now. In investing, there is no such thing as the perfect investment. Before you get started in investment you need to consider your risk tolerance. Ask yourself how comfortable would you be if your investment was drop in value. Say for example, if you invested $100 today, and two months down the line your investment is now valued at $60. How would you react? Another thing you need to consider, as I have always said from my earlier articles is your financial goals, are you investing short term or are you investing long term. When you figure out what your goal is, it will then allow you to determine what rate of return would be ideal for you to achieve your goals, say 2%, 5%, 7% etc. Once you have this essentials figured out, then you can begin to choose how and where you begin to invest, and below are some of the investment vehicles that one can use: Bonds/Debentures: A bond is like a loan, the issuer of the bond (could be government/corporation) is the borrower, while the holder of the bond is the lender. The borrower promises to pay the investor regular scheduled interest payments until maturity when the loan is paid in full. Usually bondholders can claim ownership to company assets should they fail to repay the loan. Typically, debt securities issued by the government are not secured by any physical assets, and hence classified as debentures. Mutual Funds: This is one of the most common investment vehicles used by small scale investors, or should I say start ups. A mutual fund allows a group of investors to pool their savings to invest in different/various investment vehicles. For example, if you just have $1000 to invest, it is a tall order to invest in various blue chip shares, but through a mutual fund, say 100 people contributing $1000, it’s possible to buy those stocks and even spread your risk across a variety of investments. More on these in future articles. Stock Market Buying shares in the stock market is another common investment vehicle. Buying a share in a company represents ownership interest in the net assets of the corporation that you have invested in. The good thing about investing in shares, your liability is limited to the amount invested in capital. Say for example, you invest $1000, and the company goes bankrupt, you will only loose the $1000. Should the company prosper and grow, your shares will increase in value, hence dividends and increased value of your portfolio. On the reverse though, should the share’s value decrease, your portfolio will decrease. There are other complicated investments in the stock markets, such as Options. Call option, which gives you the right to buy a stock at a future date and at a given price, and a put option which gives you the right to sell a stock at a future date. These require extensive experience dealing with stocks; otherwise without enough understanding you may lose your money just like that. Commodities: With this type of investment, you are basically dealing with future contracts such a gold, copper, silver etc. The objective is to sell the contract before the delivery date at a price that’s higher than you originally purchased the contract. This is the closet you can get to gambling, and the losses and gains here are massive, and it’s therefore my advice that unless you have an extensive experience with investing, it’s not for beginners. Real Estate: This is when you buy property for capital gains. This could be an apartment, condominium, duplex or even an undeveloped land. There is always limited supply of land, and with our population growing, its value will always be increasing based on the assumption that we will always need a place to live. I have a few friends of mine who have requested I do an article on real estate, based on my minimum experience and I will be doing an article on this particular subject in the near future. I will look into the opportunities that Africa presents. One area that is often ignored by many in terms of investing is reducing your existing debt. For example if you have a credit card that you are paying 19.99%, its always better to pay that card off than investing in lets says a mutual fund where your annual return could be about 5-6%. Remember in my previous article, I have said it before, if you cannot pay the full balance on your credit card when it’s due, it’s time to stack those cards away and stop using them. Before you get into investments, pay down some of the high interest debt first. Your money will compound faster and you will have the magic of compounding interest work for you, instead of against you. Once you develop a fundamental understanding of the various investment vehicles, it is easy to narrow down your focus on those investments that allow you to achieve your financial goals. And that’s why I have always insisted that we need to continue to educate ourselves, if we are to achieve the goals that we aspire for.