A Few Fundamental Concepts
Here are some fundamental concepts that can serve as helpful guidelines for investors.
The investor can diversify to ensure that his money is distributed among several different investments or instruments in order to spread out his risk. The more diversified a portfolio is, the less vulnerable one will be to the poor performance of a single investment.
Risk And Return
Risk can be defined as the uncertainty of the outcome of one's investment. When a customer invests, the price value of his investment may rise or fall. These price fluctuations introduce the risk that the investor may get into.
Typically, the higher the potential return on an investment, the more it tends to rise and fall in value and the less predictable is the return.
It is important for an investor to match his risk appetite with his chosen investment. That is, an investor whose risk appetite is low will not have an investment that is subject to great price swings.
Long-Term Investing vs Short-Term Investing
The period for short-term investing generally covers less than one year; medium term investing is greater than one year but less than three years; while that of long term investing goes three years and beyond.
Time allows markets to work in the investor's favor. In general, holding an investment over a long period of time reduces the level of uncertainty.
Types of Investments
When the government or a corporation needs to raise cash, it may borrow from investors. A corporation can borrow privately from lending institutions using promissory notes. A corporation can also borrow publicly by issuing commercial papers which are registered with the SEC.
On the other hand, the government can borrow from the public through instruments such as treasury bills, notes and bonds.
Since debt instruments are normally longer-term investments, interest payments tend to be higher than term deposits.
A common stock is a unit of ownership in a corporation for which the holder can vote on corporate matters and receive dividends from the company's earnings. Therefore, when the investor purchases a stock, he becomes a part-owner of the whole company.
Although investing in stocks involves higher risks versus investing in debt or money market instruments, you can take advantage of the higher earning potential that can be gained from stocks through capital appreciation and dividends. Furthermore, stock investments have in general outperformed bond and money market instruments over time.
An investment fund pools money from unrelated investors with similar investment objectives. The fund is managed by a portfolio manager who invests the money in a portfolio of securities and / or other instruments according to the specified investment objectives.
A fund offers several distinct benefits to investors:
- As a single investor, it may be difficult to achieve diversification. Funds enable you to purchase various types of securities and other instruments to build a diversified portfolio.
- The fund is managed by experienced professionals who have access to information on the economy and market movements.
- Through the fund, you can invest in a diversified portfolio, enjoying the same earnings potential from the securities that would have been accessible exclusively to institutional investors.
- Funds make it possible for investors to buy instruments at a lower cost. When the fund buys different instruments, the cost of buying these instruments is divided among all investors versus the sole investor bearing the total cost.
Building Your Own Portfolio
No two investors are alike; people have different goals when they invest. When a customer invests, he should determine his objectives for investing.
Generally, the investor may invest for the following reasons:
- Regular Income / Earning Stream
- Wealth Accumulation
- Capital Preservation
- For Retirement
- Child's Education
- Business Formation
After determining his investment objectives, the investor must then ascertain the risk he is willing to take to try to fulfill these objectives.
Factors that an investor should consider before investing:
|Time Horizon||Time horizon refers to the period over which the investor is willing to keep his money invested.|
|Investible Funds||This refers to the money the investor can set aside for investing. Prior to investing, most financial experts suggest setting aside cash reserves equal to at least six months of expenses.|
|Investment Options||Once the investor has determined his investment objectives, his risk-return preference, his time horizon for investing and the funds he has available, then selecting investment alternatives that would suit his profile will be easier to determine.|
Investments are not deposits or obligations of, or guaranteed or insured by, Citibank®, N.A., Citicorp or any of their affiliates or by any local government or insurance agency and are subject to investment risks, including the possible loss of the principal amount invested. Past performance is not indicative of future performance, prices can go up or down. Investors investing in instruments denominated in non-local currency should be aware of the risk of exchange rate fluctuations that may cause a loss in principal. Investments are available only to investors who are neither citizens, residents, nor green card holders of the United States.
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