Investing is a way of lending money to the economy, and then sharing in the growth of the economy. There are a variety of investment options. To generate and increase wealth, investment is an asset. Investors master the art of multiplying their funds and yielding profits from every single investment.
Many people often confuse investments with setting up and developing a savings account. However, both are polarized in terms of their attributes. The concept of saving refers to the unused amount of cash or wealth you save in your home or bank accounts unless they are needed. Whereas, investment refers to the amount an investor uses to put in a variety of areas such as property, bonds, stocks, and term deposits.
In return, the investor wants to receive substantial amounts of profits and maximize earning over investment ratio. Those that can generate dividends, interests, or rents through shares, bonds, or property you lease out, can be described as ‘income gains’. Whereas, capital gains are defined as the profits you can gain by selling your investments that can increase their value with time.
- Why Should We Invest?
- Characteristics of a Good Investment
- How to Identify a Good Investment Opportunity?
Why Should We Invest?
The million-dollar question of why you should invest cannot have a single answer that can convince a non-investor. However, with the help of several reasons, you can convince others to invest their money in a specific financial area.
- The activity enables you to be independent and use the profits generated for yourself.
- You can receive a sufficient amount of earnings to meet your ends.
- Profits can be saved for later use.
- You can achieve your financial needs and goals.
- Helps your money to pace with inflation and frees you from the worries of devaluation of the currency.
Under circumstances such as medical treatment, property destruction by a natural calamity, or any other sudden incident that is unprecedented and can unsettle you, you can be sure that you have a buffer amount that can be used instantly. Your investment will provide you with the type of financial security required in those situations.
Characteristics of a Good Investment
Although there are numerous ways to make money with investments, every single strategy doesn’t work according to your plans. It is an undoubted reality that planning an investment opportunity is easy but executing it might be difficult. In this article, we have shed some light on the attributes shared by many of the best investors. Employing the following traits will help you stack the odds in your favor:
1. Employing Different Investment Strategies
A good investor puts all emotional and personal perspectives aside and applies a more professional and critical approach. There is no doubt in the fact that behind every successful investment is a person with a strategic and creative mind that finds ways to improve. An investor develops, assesses, and implements certain investment strategies to help flourish their investments. We have seen many investors who put little effort into creating proper investment strategies and as a result, they are exposed to failure and jumps from one trade to another. Developing and implementing a proper investment strategy helps you in the following areas:
- Helps you determine an objective and ideology.
- Builds portfolio for individual investors.
- Must be capable of function in different market environments.
- To work according to the evolving market trends.
- How to make more profit.
- Should be measurable versus a key benchmark of S & P 500.
2. Invest and Reinvest
With every passing day, an opportunity is lost to generate wealth from those investments if you have still not invested. Investing in your finances early gives you more exposure and opportunities for success. On the other hand, when you have earned a profitable amount, you can re-invest them to increase your total investments which keep on rising with time.
3. Explore New Dimensions
Diversifying investment has helped a lot in knowing each of the possible advantages and disadvantages. Do not lay all of your eggs in one basket to minimize the risks of failure. If one investment has incurred a loss and is not working well, you have the other option to rely upon. Think smartly and invest cautiously.
4. Choose Your Opportunity Wisely
Investing with a good company that is performing well and paying good dividends must be your top priority since risks are minimized with them. On the other hand, one must always invest at a higher rate to earn a similar profit. Although an expert says that higher returns tend to be riskier. If an investor is mentally prepared for any possible risks, they can handle it as well.
5. Types of Risks to Consider
Risk assessment is an important component of investment evaluation. You cannot earn a good amount of profit if you are unaware of the possible risks that might come. Several risks can influence your returns over a longer period. When making any decision, consider the probable risk factors that you might face later. Types of risk that must be considered while investing include:
- Inflation: A risk that comes when the ROI does not exceed inflation. If the inflation rate in the given time is greater than the rate of cash flow that the investment produces, an investment of today can decrease in real value. High inflation undermines all investments that are not providing a higher return that can be difficult for investors to handle.
- Market: An investor’s investment may not be directly affected by the cause of the loss but can suffer risk from the loss of financial markets. Political uncertainties, terrorist attacks, recessions, or changes in interest rates can affect the performance of financial markets and can lead to market risks.
- Liquidity: The liquidity rate depends on the size of the security. The smaller the size of the security, the larger the liquidity risk. When it’s hard to convert the investment quickly into cash when it is required, this type of risk is known as liquidity risk. It can force investors to sell their investments at a low price.
6. Good Return On Investment
The higher the investment, the higher is the return. If it was not for return, there would be no investment. The main intention of investing money is to earn returns in the form of profits that an investor expects to get in the future. Due to the power of exponential growth, every percentage point matters and can have an observable influence on your wealth later.
7. Fair Value
Due to various market factors, sometimes individual investment options are overpriced which means the market is always not fair. A good investment is sold at a higher price and therefore observes higher demands. However, you can certainly put yourself in danger if you overpay for a good investment.
Always scrutinize its fair value before you dive into investing your money. Invest at the right time to get favourable returns rather than being influenced by market sentiments. Fair prices can be calculated by analyzing and comparing historical data with current valuation. Hence, an investment can be justified when the purpose behind them is well-explained.
Investors surely do not want to be stuck in a long-term investment, even though they used to like it. Investors who have a modern approach prefer liquidity since it allows the ease of existing and recalibrates whenever they feel the need. The degree of liquidity is different for each type. ETFs and large-cap stocks are traded daily. You must add liquid and illiquid investments to your portfolio to help you with effective risk management. These are more stable and do not have real-time pricing, which is the reason why they are not listed in the market. This further saves you from making impulsive decisions.
9. Long-term Viability
Long-term investments are proven to grow with time. Many experienced investors believe that good stocks will generate more value in the long run and do not require you to constantly recalibrate your investment.
How to Identify a Good Investment Opportunity?
The only difference between a good and bad investment opportunity is determined by the amount of profit generated through them, the possibility of risks, and the chances of success. Remember, the possibility is independent of probability.
There are chances that you might face failure but it is not guaranteed. Many people are often scared of seasonal losses that are an active part of investment but they cannot hinder your efforts and motivation in those you will make in the future. A good investment ensures that not all of their money goes in vain.
However, a good investor always knows how to avoid these losses and recover from a loss. To further avoid losses, you may opt for short-term investment opportunities since it provides more financial security, however, they won’t have greater scales of return.
Avoiding the wrong types of investments and implementing the right strategies can pave your way to a successful transaction. However, it is possible that a person can still lose money following the relevant tips that might look attractive at first glance. However, if you consider the traits of good investments listed above with a touch of care, you can avoid many of those opportunities that continue to disappoint. As we have mentioned, every investment opportunity doesn’t need to be followed, you need to optimize your strategies and manage your risk based on your financial status.