There are many ways to invest money in the stock market. Some do not require deep knowledge of how financial markets work, while others are only for professionals.
To the most common subjects for investment on the stock exchange can be included:
- Investing in stocks.
- Investing in bonds (government or corporate).
- Investments in precious metals (gold, silver, platinum).
- Investing in ETFs or mutual funds.
- Purchase of foreign exchange.
- Investing in derivative financial instruments (futures, options, swaps, etc.)
For convenience, private investments are divided into groups according to their timing. There are three groups:
- short-term (period of up to a year);
- medium term (from 1 to 3 years);
- long-term (from three years and up).
Nowadays there are two main styles of investing. The first is passive investing. It is characterized by investing for a long term. This style of investing presupposes that a person invests money, for example, in shares of a company and keeps them for several years without selling them. As a rule, passive investments are made in large commodity, technological and financial companies, they have lower risk of sharp quotation drop, such companies often pay dividends.
The second style is aggressive investing. Here it is implied that an investor invests money in more risky instruments. For example, not in shares of industry leaders, but in shares of smaller companies – when markets fluctuate such securities rise and fall (i.e., have high volatility), but due to the same quality one can earn more. This kind of investment requires a deep understanding of the market and a willingness to lose the money invested.
How to invest for a private person
A private person cannot trade at the exchange on their own. Brokers do this, and they also act as intermediaries between the exchange and the investor. You need to open a brokerage account, and then the account holder can buy/sell securities.
Brokers also offer the services of a professional asset manager. Together with specialists you choose an investment strategy, agree on the conditions of what shares to buy/sell, and further on the manager makes decisions about your portfolio.
Do you have to pay taxes on investments?
There are three most common ways to make a profit. Get the difference between buying and selling security, receive a coupon payment on a bond, or receive dividends. All three types of income are taxable. They are paid to the state for the investor by the broker.
Profitability and risks
Investments have two key qualities that have a direct correlation. These are profitability and risk. The higher the risk associated with an investment, the higher the potential return can be. And vice versa – relatively reliable investments never allow counting on a high return.
For example, a bank deposit, which can also be considered an investment, or the purchase of government bonds are low-risk investments. Bank deposits are insured, and in the case of government bonds, the government is the guarantor of the refund. But the return on such investments is also lower than the potential return on stocks, which can be affected for a variety of reasons, from market to corporate.
To illustrate the connection between risk and return, another example can be given. Bonds with a 10-year maturity bring the buyer a higher return than, for example, a three-year bond. The following principle applies here: the higher the term of the bond, the greater the risk is taken by the investor (after all, a lot can happen in 10 years even with government bonds) and thus the greater the risk he must be compensated for.
Portfolio of investments and its diversification
The totality of all investments made by an investor is called an investment portfolio. An investment portfolio may consist of shares of one single company, but analysts and experienced investors recommend not spending all of your capital on one security. To reduce risks and increase profitability of investments, the investment portfolio should be diversified, i.e. investments should be divided between different securities.
Even developed economies and large companies inevitably face periods of decline and stagnation. To protect yourself from such situations, your investment portfolio should include not only shares, but also bonds, deposits, and exchange-traded funds. Professional investors add commodity delivery contracts – futures – to their portfolios.
Shares are considered the riskiest, but the most profitable part of a portfolio. Exchange-traded funds are the golden mean, associated with relatively low risk and high return. The protective part of the portfolio is bonds and deposits, which stabilize the portfolio in case of strong volatility, it is the most reliable part of the portfolio.
In addition to asset diversification, it is also important to allocate the portfolio to sectors or industries. The importance of this principle is readily apparent in a careful study of any economic crisis. During such periods, when some stocks go down, others go up. This creates a balance and allows losses to be minimized.