What’s an investment?
When one wants to generate income or preserve capital, they invest money. Here’s a simple example of financial investment: your friend opened a profitable business. You give him let’s say £1,000 and become a part of his company. If profitable, you may be entitled to a dividend payment as a result of becoming a shareholder of his company. If the business grows, you could get more money.
Investments can be financial (when you purchase securities) and real (investments in industry, construction, and so on).
The investment world is open to anybody, you don’t have to be a big Wallstreet boss to start investing. But on the contrary to private investors, there’re traders. These guys constantly conduct short-term transactions as this is their main source of income.
But you should always keep in mind that despite the fact that people invest to make money, there’s no guarantee that it will work. Once you’ve stepped on an investment path, risk will follow you wherever you go.
Types of investments
There’s a big choice of investment types in economics. Let’s see in what you can invest:
- in stocks;
- in bonds (government or corporate);
- in precious metals (gold, silver, platinum);
- in exchange-traded funds ETF or mutual funds;
- in currency;
- in financial derivatives (forwards, futures, options, swaps).
Investment portfolio and its diversification
Thanks to technology, there’s a cool thing called an investment portfolio, that consists of all your shares. We say “shares” because to reduce risks and increase the profitability of investments, it’s better to invest in more than one share and diversify your portfolio, which means to buy shares of different categories, together with stocks and ETFs.
The bad news is that even developed economies and large companies can face periods of recession and stagnation. Good news – when something falls, there’s usually something that rises. That’s why it’s important to diversify your portfolio.
The riskiest, but at the same time potentially the most profitable part of the portfolio, are stocks. The protective part of the portfolio – bonds, and deposits, which can stabilize the portfolio in case of strong volatility. ETFs can fit anywhere along this spectrum depending on the exchange that the ETFs track.
By the way, you can create your first portfolio in Orca, a beginner stock trading app. Our education section will help you not to get lost. Or you can consider transferring your ISA to the Orca app. The good news is that it will be totally free.
With the variety of investment types, there’s also a variety of terms. There are three of them:
- short-term (up to a year);
- medium-term (from 1 to 3 years);
- long-term (from 3 years and longer).
Long-term investments are typical for passive investing. This style assumes that a person has invested money, for example, in a big company’s shares and keeps them for several years without selling. There’s also active investing. Here the investor deals with more risks and should have a deep understanding of the market and a willingness to lose the investment.
More classifications from learned dudes
The significance of investment is so high that scholars couldn’t stop classifying it. The last one here is classes. There’re six of them:
- Real investment (the purchase of a ready-made business, for example).
- Financial investments (the purchase of securities or financial derivatives).
- Speculative investments (the principle here is to buy cheaper, sell more expensive. The subject of speculative investments can be stocks, and besides them – currency, precious metals, bonds).
- Venture investments (long-term investment in young companies. Venture capital investments are associated with a high risk of completely losing investments, but they can also bring investors super profits).
- Portfolio investments (investment in several shares at once)
- Intellectual investment (investing in an intellectual product like scientific developments, objects of intellectual property, the creative potential of a group of people).
Oh no, taxes
Yes, folks, taxes, and risks teamed up to spoil your life a bit. You can make a profit by buying and selling security, or by getting a bond coupon or dividend, but all the income will be taxable.
Profitability + risks = investments
You want a profitable investment? Sorry to tell you, but be ready for risks. The higher the risk with which the investment is associated, the higher the potential return can be and vice versa.
For instance, government bonds are a low-risk investment as the state acts as the guarantor of the money back. But the profitability of such investments is lower than the potential profitability of stocks, which can be influenced by a variety of reasons from market to corporate.
Risk also depends on the terms of the investment. You’ll get a higher return from long-term investments rather than short. On the other hand, the longer the term, the greater the risk, as even with the most secure bonds or shares can happen a lot in 10-20 year, that’s why a long-term investor needs to be rewarded for the risk with higher profit.
How to start investing?
- Download the Orca App;
- Create your investment account;
- Set a financial goal;
- Analyze current stock market;
- Diversify your investments;
- Calculate your potential income via Orca’s stock and shares ISA calculator (https://orca.app/uk/invest/isa-calculator/)
- Become rich (or not).
Important! An individual cannot trade on the exchange on his own. Brokers are engaged in this, and they also act as intermediaries between the exchange and the investor.