If you keep all your savings at the bank you are missing out on a broad range of investment opportunities that can earn you a higher rate of return on your money. Take a look at just a few of the alternative financial instruments that you can add to your financial portfolio.
Also known as shares or equity this type of investment is more volatile than most. When you buy shares in a company you become part owner of that company and so you are entitled to a “share” or portion of the profits made. Shares are traded on public stock exchanges so you can buy them directly or you can invest in them by placing your money in an instrument that is backed by equity investments such as a mutual fund (which will be explained below). You make money when the price of the stock goes above what you paid for it, which is also known as capital appreciation, but this is only realized if you sell the stock to cash in on the gains. You also earn a return in the form of dividends which are payments made to you (the shareholder) as compensation for your investment in the company. The decision to pay these dividends at all rests with the company’s board and how much to be paid is also up to the company. As a shareholder you simply accept the returns, but you are not as powerless as it might seem. You can sell you stock if you are dissatisfied with its performance, but you must remember that there are costs or commissions associated with both the purchase and sale of this instrument.
A bond is a loan to a company. In essence, when you buy into a bond you agree to lend your money to the issuer of the bond in return for the rate of interest quoted. Bonds are more stable than stocks because the rate of interest is known upfront and the interest payments are regular and guaranteed. Corporate bonds usually pay a higher rate of interest than government bonds but there is also more risk associated with corporate bond issues.
A mutual fund is a type of pooled investment. They are issued by financial institutions that place experienced managers in charge of deciding where the money collected is invested. The fund may be backed by stocks, bonds or a mixture of both. If you decide to invest in a mutual fund be sure to find out what fees are involved, what the constraints on withdrawals are and ask to have a look at the past performance of the fund.
Another way of earning a return on your money is by buying physical property. Although this is considered a much longer term investment it could pay off handsomely as historically real estate tends to trend upward. Bear in mind however that putting your money into a property means that you enter into a different realm. You must now safeguard your physical asset and absorb the cost of maintenance. You can generate cash flows if you decide to rent it or you may prefer to look for undervalued properties to refurbish and then sell in a relatively short time.
Each of the options mentioned above comes with a different degree of risk and return, so it is up to you to decide what is right for your needs. Your goals are unique to you and so is your level of income and risk tolerance so it is impossible to recommend a generic suite of investment products that are the absolute best. The best investment is one that strikes a balance between the risk you are willing to accept and the interest you want in return, which is why it is important to know the facts and explore your options so you can make an informed decision about where to keep your money.