In order to make money from investing, it requires a great deal of discipline, hard work, and determination. Many people who are making an investment for the first time are unsure of where to start. Before making an investment, it is important to educate yourself so that you are sure you are making the right decision. In doing so, it can be beneficial to keep the following basic rules in mind:
Risk vs. Return
When discussing investments, many people are familiar with this notion: the greater the risk, the greater the reward. Individuals who put their ability to receive a return on their investment have the potential to see a greater rate of return. As an individual investor, it is important to try and get the highest rate of return without going beyond a comfortable risk level.
Inflation is defined as the general increase in prices and fall in the purchasing value of money. When dealing with investments, if inflation is higher than the return on your investment, you can lose future purchasing power.
Liquidity and Marketability
A liquid investment is any investment that can be easily converted into cash without having a great impact on its value. For example, this can include money market funds or shares of publicly held companies. Alternatively, a marketable investment can easily be sold or redeemed for cash. Examples of this can include government bonds or common stocks.
As an investor, it is important to always calculate your return after taxes. Some investments have tax advantages that increase their after-tax yield. For example, tax-exempt bonds carry a lower return rate than taxable securities. However, the after-tax return may be higher with tax-free investments than taxable ones.
Income vs. Appreciation
There are some investments that provide current income while others have little current income, but appreciate over time. The best investments will provide both income and appreciation.
There are some investors who like to manage their own portfolios. However, others do not have the knowledge or time to give it the attention it needs. An investor’s involvement can help determine the best kinds for them.
Using “other people’s money” in order to leverage into an investment can increase the potential of receiving a higher return on an investor’s own dollars. However, this poses a higher risk, which is why it is important to assess your comfort level.
Investors who wish to play it safe rely heavily on diversification. This means they are making two or more kinds of investments, that way if one goes wrong they will not lose everything they put in.
It is important to outline your goals for not only yourself, but your broker or financial advisor. In addition to this, no investor should put money into something that you do not understand or are not comfortable with. Deciding your objectives helps to determine what types of investments you should make.
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Werdann DeVito LLC is an experienced Certified Public Accountant firm serving clients throughout New Jersey with all of their financial needs. If you need quality assistance with accounting, tax, or consulting services, contact Werdann DeVito LLC today.