Sunday, July 8, 2007

Ways to Invest

Have you started saving for your emergency fund? I encourage you to do so if you have not. For those who have already reached the targeted emergency fund, I congratulate you. This means you are ready to invest.

There are a number of ways that you can invest in the financial markets. As an investor, you would want to make the right investment choice that best suits your financial needs. Hence, you must take charge of your own investment.

As a start, you should get yourself familiar with the different types of investment instrument available in the financial market. The common ones are:

a) Bank Deposit
Bank deposits like fixed deposit accounts are usually short term investments to hold money for use in the near future. It is easily convertible to cash. Such deposit has low risk of losing value but offer low potential returns.

b) Insurance Products with savings or investment element
These are product that provide not only protection but also a saving or investment plans. Examples of these are whole life polices, endowment polices, annuities, and investment linked insurance policies.

c) Bonds
When investing in bonds or fixed income/debt securities, you are actually lending money to finance a corporation or the government's operation, becoming a creditor of the corporation or government. Bond investments are interest earning and the bonds value appreciate or depreciate in relation to interest rate changes. This is generally a safe investment. However, except for bonds from the government, bonds carry the potential risk of default, no matter how remote that risk might be.

d) Structured Deposits
A structured deposit is essentially a combination of a deposit and an investment product where the return is dependent on the performance of some underlying financial instrument. Typical financial instruments linked to such deposits include market indices, equities, interest rates, fixed income instruments, foreign exchange or a combination of these.

e) Mutual Funds / Managed Funds /Unit Trust
A mutual fund is an investment company that takes cash from investors and invest it into diversified securities, providing investors with both diversification and professional management of their funds. A mutual funds invest in stocks, property, bonds, options, money market securities, and commodities to name a few, depending on the fund's investment objectives.

f) Shares and Equity
Stock investment is equivalent to holding an ownership in a corporation, and your investment value appreciates as the price of the shares or equity goes up and vice versa. This is considered a high risk investment, unless you managed it well with great discipline.

g) Option Trading
An option is a contract between two parties giving the taker (buyer) the right, but not the obligation, to buy or sell a security at a predetermined price on or before a predetermined date. To acquire this right, the taker pays a premium to the writer (seller) of the contract. There are two types of options available: call options and put options. Call options give the taker the right, but not the obligation, to buy a security at a predetermined price on or before a predetermined date. Put options give the taker the right, but on the obligation, to sell a security at a predetermined price on or before a predetermined date. The taker of the put is only required to deliver the underlying shares if they exercise the option.

Above are just a brief account of what they are. You will get more details in due course. So stay tuned.

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