Financial Assets, Ever since we started adulting we have also understood the importance of earning to thrive and strive. Even if being super-rich is not on our ‘goals-list’ we all definitely dream of a comfortable and luxurious life.
Therefore, as much as earning a fulfilling amount of money is important, so is spending it smartly and even a smarter choice than that is INVESTMENT/Financial Assets. We often hear words related to investments on television, on radio, read advertisements on newspapers and where not. It is equally important to know and understand all sort of assets we can and we should invest in.
What type of asset should we invest in?
More we know more we grow, therefore we would read about a few assets, namely – shares, debt, commodities, property, cash, hedge funds, cryptocurrencies and alternative investments, which are available for us. These of course have their risks but also rewarding characteristics.
- Companies issue shares. If one own ever share of the company, they literally own the company. A company whose shares are not traded on a stock exchange is basically a private company. They are called Private equity when institutions invest in them.
- Investing in a private company can be considered rewarding but also difficult to turn the investment into cash as compared to investing in a public company. One should, therefore, demand, higher returns for this investment. Private companies aren’t subject to as many rules in comparison to public companies who have to keep investors informed and also abide by number of rules.
- A shareholder is rewarded in two ways, i.e. one gets dividends (share of company’s profits) and when the prices go up one gets capital gains.
- The prices of shares are determined by demand and supply. Less sellers, more buyers mean rise in prices and vice versa. Share prices may react to things outside the control of the company, hence making them volatile.
- Lot of companies borrow money, making this sort of investment risky.
Debt investments is a type of Financial Assets & can be in many forms. Debts are the type of assets which are held more for income rather than generating Capital gains. They are classified by the identity of the borrower, the risk factor, chances of getting repaid, time gap of due, security for the lender, if the debt can be changed for some other assets and the rate of interest charged. Lower risk debts usually tend to be lower return.
One may invest in company issued debts in various ways. Corporate bonds are the debt traded on stock exchange, but financial companies like banks can issue any sort of tradable debt instruments.
We can invest in commodities, for example, expensive metals like silver, gold, crude oil, grains, wood, etc. These, although don’t pay any income, rather some of these cost money to hold, therefore people invest in them in a hope of capital gains. Their prices can although be quite volatile as well as unpredictable, therefore tend to be of higher risk but also of higher rewards.
Buying property is one of the best long term investments one can make. When we own a house we already have a great exposure to property.
Rates of property tend to increase accordingly to the level of development of it’s surrounding area. Residential property may perform very differently than Retail property, Official property, and industrial/logistics land. Properties hold similar attributes to those of shares. There are high chances of capital gains in the form of risen rents, building new properties or expansion, and refurbishment of the existing property.
Although, before investing in property one must consider the need for a lot of cash and also remember that a lot of companies borrow funds for return enhancement making them riskier.
Cash is literally the simplest type of asset one can own. The only true value cash might hold is relative to cash issued by other countries (rates of exchange). Investing in cash requires the understanding that there can be a lengthy period where the return we earn (interest) is lesser than the rate of inflation. Inflation can erode the real value of investment over time.
Putting money in deposit with a bank is as much as same as lending money to the bank. The only risk can be, the bank being unable to repay the money we lend or deposit to the bank, whose chances are very low. Normally the longer we keep the cash in the banks, the higher the rate of interests we get.
6. Hedge Funds
Hedge funds might invest in any of the assets but also in derivatives i.e. financial contracts which may take any form but essentially give us the rights to sell/buy an asset at a fixed price in near future. Derivatives might be designed so as to reduce the market risks and also enhance the returns with no necessity of borrowing any money. They allow investment in much smaller quantities as well.
Investment in cryptocurrency could be considered good as well as not so good. Cryptocurrency are young form and currency in the market and market has always been volatile.
The longer the currency been around, the highest is the market cap and higher volume therefore lesser the risks. Consider a list of cryptocurrency before investing, list down the pros and cons. Bitcoin, Litecoin, or Ethereum are least risky if compared. Bitcoin is currently the coin on the top having most longevity, volume as well as market cap but also is the most expensive.
There are many assets that don’t fall clearly under any category. There have been funds created to invest in diverse objects like Insurance policies, development infrastructure, aircrafts, dams, etc. The rewards and risks are highly varying.
What did we understand?
We can therefore believe that investment in permanent assets is highly rewarding, smart and important if not essential. Every investment although have their pros and cons. It is very important to research about any asset we want to invest in to be safe or maybe just to expand our knowledge.
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