From the desk of Nikolas Xenofontos, Director of Risk at easyMarkets.
Are you looking for possible ways to invest your hard-earned money? Everyone wants to put their money to work, but understanding the different options to build your investment portfolio can be daunting. It’s important to understand what your investment goals are, and which investments are the best for what you are trying to accomplish.
Here are some of the most common investment vehicles, along with their pros and cons.
When you buy stocks, you are buying into the success – or failure – of a business. Think of this as becoming a part owner of the business – which you are. Because you have bought stocks, you are often entitled to show up at stockholder meetings and vote on major company issues.
You can also share in the company’s success in one of two ways. First of all, the stock price can go up or down because other investors see the company’s potential. You may also get dividends – which are essentially a share of the profits – although not all stocks offer dividends.
The problem with stocks, however, is that the price moves up and down a lot. This is known as volatility, and you may see big movements on a daily basis. Also, if the company does badly, then you may lose a significant part of your investment – and those dividends you are counting on to generate returns may dry up as well.
A bond is very different to a stock – you are guaranteed a specific return under most circumstances. These are also known as fixed-income securities, and are basically a loan to the company – or government – that you are lending money to. Some bonds are risky – you’ve probably heard of junk bonds with risky companies – but if you invest in government bonds or blue-chip companies, then your returns may be relatively safe.
On the other hand, the problem with bonds is that the returns are relatively low. There is no upside if the company does well, or if the national economy booms. You are accepting lower returns in exchange for low risk, which makes the returns very modest. If you are looking to protect money against inflation, or are approaching retirement, then bonds may be a good choice. On the other hand, if you’re looking to grow your portfolio and are willing to accept risks, then bonds may not be for you. However, remember that bonds may be a good hedge against adverse market conditions.
Of course, there are also many other investments that are available to you. For example, there are options, commodity futures, foreign exchange markets, real estate and others. In general, these investments offer higher risks and rewards than stocks or bonds – but they also require more sophisticated investment strategies because they are more complex. If you are a novice investor, you may want to first build your expertise and knowledge. Even so, don’t assume that the things you learn in the stock and bond markets apply in these alternative investments – recognize that you need to understand these markets intimately in order to succeed.
Risk warning: Forward Rate Agreements, Options and CFDs (OTC Trading) are leveraged products that carry a substantial risk of loss up to your invested capital and may not be suitable for everyone. Please ensure that you understand fully the risks involved and do not invest money you cannot afford to lose. Our group of companies through its subsidiaries is licensed by the Cyprus Securities & Exchange Commission (Easy Forex Trading Ltd- CySEC, License Number 079/07), which has been passported in the European Union through the MiFID Directive and in Australia by ASIC (Easy Markets Pty Ltd -AFS license No. 246566).