The world of investment can be daunting. Faced with unfamiliar concepts and the thought of potentially losing hard-earned cash, many would prefer to hide their money under the proverbial mattress.
While stashing your cash away may seem like the wise option you’re actually not doing yourself any favours by not giving your money the opportunity to grow.
Through investing,specifically in the stock exchange, you open yourself up to some exciting possibilities which could ultimately lead to financial freedom. The following are the five concepts that every first-time investor should understand before taking the leap.
Eggs and baskets
Diversification entails investing in a variety of assets with a view to reducing your overall risk should one or more lose value. Your portfolio can be spread out among multiple investment vehicles such as stocks, bonds, mutual funds, options and futures, precious metals and real estate.
The choice is yours. Ultimately, you want to avoid putting all your eggs in one basket. Keep in mind though that no matter how much you diversify your portfolio, there is always an element of risk involved whenever you invest.
Up and downs
In simple terms, volatility refers to the frequency and severity with which the market price of an investment fluctuates.Higher volatility means that the price can change dramatically over a short period of time in either direction. Lower volatility means the value changes at a steady pace over time.
It is possible to make money from volatility but shouldn’t be attempted by the first time investor. Experienced, market savvy investors use volatility to their advantage through buying more of what is cheap and selling more of what is expensive.
Show me the money
Investing involves fees usually in the form of broker fees, entry and exit costs, financial advisor fees, performance fees, portfolio management fees and the like. Even though the fee may seem small or reasonable(just a few percent upfront and annually) it can have a significant impact on the long term performance of your investment.
By law, a full breakdown of all investment fees should be provided upfront by investment service providers.Should you have any doubts, ask questions and review the on-going costs on a regular basis.
Eye on the prize
The investment horizon refers to the total length of time an investor expects to hold an investment or portfolio.The investment horizon is used to determine the investor’s income needs and desired risk exposure.
The investment horizon differs greatly from investor to investor. For example, a young, well paid professional will have a very different investment horizon from a person nearing retirement.
Your money clone
Compounding refers to the ability of an asset to generate earnings which are then re-invested in order to generate their own earnings. In essence, compounding makes the money you save today more powerful than the money you save tomorrow.
This means that while you’re working your money is also working hard for you. Thanks to the benefits of compounding, many an investor has been able to reach their financial goals.