Investments for Beginners
Investing refers to purchasing financial products with the expectation of
receiving a regular income or witnessing an appreciation in the amount of
infused capital. Every investor needs to have a strategy depending upon
his/her appetite for risk, the predefined goals and the time horizon. An
individual's time horizon, that will determine the length of time during
which the money is invested, depends on the time periods when the desire
for liquidity will be the investor's prime concern.
The Purpose of Investment
Investments are undertaken for the purpose of capital preservation or for
quenching the desire for capital appreciation. While the former is a
conservative strategy that aims to avoid the loss of invested capital by
ensuring that the return on investment is at least equal to inflation,
the latter results in an increase in the market value of the investment.
Capital growth/appreciation is desired by people who are in their youth
and are willing to pursue aggressive strategies that involve assuming
above average risks in anticipation of above average returns. Capital
preservation is for the cautious investor and people who cannot risk the
loss of capital and hence pursue conservative strategies that provide
regular income in the form of interest and dividend.
Investments for Beginners
Beginners can try investing in mutual funds and then move on to bonds,
stocks and alternate investments.
Mutual Funds: Mutual fund managers raise money from people by issuing
shares and investing the pooled money in assets like stocks, bonds, and
other securities, in accordance with the stated set of objectives. Mutual
funds are managed by professional money managers who ensure
diversification of capital by investing in a vast array of securities.
The transaction costs are also lower on account of economies of scale. A
person, who invests in mutual funds, is entitled to receive interest
income from bonds and dividends from stocks which may be distributed to
the shareholder in the form of cash or additional shares. Capital gains
are also likely in case the fund sells securities that have increased in
value. The investor may also sell his/her share in the mutual fund for a
profit. Mutual funds can thus prove to be the best investment for
beginners. One must remember that the profitability of the fund is
contingent to the fund manager's abilities in choosing appropriate
Bonds: Bondholders are the creditors of a company and are entitled to
receive interest for the amount of money that is loaned by them. Although
this seems like a risky investment, buying bonds issued by the government
of an economically and politically stable country entitles the bondholder
to a steady stream of income. In the US, the government issues Treasury
bills, Notes, Treasury Bonds, Treasury Inflation-Protected Securities
(TIPS), I Savings Bonds and EE/E Savings Bonds. In addition to investing
in the bonds issued by the Federal Govt, investing in tax free municipal
bonds, like General Obligation bonds (GO) and Revenue Bonds, that
generate income and also result in capital preservation, can be a
wonderful option. A number of municipal bonds are exempt from federal,
state and local income taxes. It is worth mentioning that Treasury bills
do not pay interest but are sold at discount to par. The appreciation in
the value of the bill provides the return to the bondholder. The
interest, in case of Treasury Notes and Treasury Bonds, is exempt from
state and municipal taxes but is federally taxed.
Stocks: In the articles, "How to Play the Stock Market", "Online Stock
Trading Tips" and "Buying Stocks Without a Broker", stock investment for
beginners has been explored in detail. It will suffice to state that
stock investing is an activity that requires considerable knack for
picking the right stocks.
Alternate Investments: People who have experimented with the
aforementioned investments for beginners, can move on to derivatives and
An investors needs to determine a suitable strategy and decide on the
level of risk that he/she is willing to undertake before venturing into
the world of investments.