People tend to shy away from investing. Why? Because of the level of uncertainty associated with it. Let’s face it; returns are not guaranteed in the science of investing but, don’t let fear overcome you.
Learning about different types of investing activities is the perfect start. Understanding the options available to you and how they have the advantage when you are ready to hop into the market.
Investing Activities Defined
When you invest money, the intention is for your funds to grow exponentially over time. Some investment activities require patience, determination, and risk. Others are more laid back. Regardless of the path, investing activities are meant to provide you with a future financial return.
Investing Activities Versus Financing Activities - The Difference
When you think of financing activities, what comes to mind? Many associate it with borrowing money or money-earned investment activities. Financing activities occur when there is a transaction between yourself and either a creditor or if you own a business, an investor.
When reviewing a cash flow, financing activities are broken down between inflows (cash coming in) and outflows (cash going out). Here are a couple of examples of each:
- Inflow - Borrowing money from a financial institution
- Inflow - Selling treasury shares
- Outflow - Making payments towards a loan
- Outflow - Repayment of debt securities, such as a government or municipal bond
Types of Investing Activities
Investing activities are broken down into three main types:
- Cash equivalents
- Stocks and,
Let’s break each of these categories down further next.
If you have a cash equivalent, it is considered a liquid asset, meaning an investment that can quickly be exchanged for cash or another asset. When you think of cash equivalents, what comes to mind?
How about certificates of deposit, treasury bills, treasury notes, and marketable securities? Any type of investment that can mature within three months is considered a cash equivalent.
Certificates of deposit (CDs), for example, have a short-term commitment but a locked-in rate. This means that your money is locked behind bars until the date of maturity. During that time frame, it earns interest at regular intervals.
What does it mean when you invest in stocks? You become an owner of the corporation selling it. They are liquid investments, too, as they can be bought and sold daily while the market is open.
Stocks come in all shapes, sizes, and values. It boils down to the type of investor you recognize yourself to be: one that is willing to build in a high level of risk and prefers a more conservative approach.
When researching the right stock for your portfolio, think about your interests. Is there an industry you’d favor over another? Also, think about the company’s growth and value—the stronger the company, the greater the return.
Here’s an example. How about S&P Index 500 stocks? These stocks include some of the most successful companies globally, such as Amazon, Facebook, Apple, and Microsoft, to name a few.
A bond lives within the same family as a loan. Bonds specify a term where interest payments and principal are collected. Here are a few examples of bonds you may be familiar with:
- Corporate Bonds
- Municipal Bonds
- Mutual Funds
- Treasury Bonds
- Government Fund Bonds
Bonds pay interest twice a year, making them a predictable source of income. The interest is fixed, and the future date is predetermined, so they are a stable form of investment. They also provide diversity in an investment portfolio.
Other Investment Activities To Explore
Take your time and make sure you are comfortable before making any decisions. Cash equivalents, stocks, and bonds are just one avenue to invest in. There’s still more you can explore.
Gold, silver, platinum, palladium, and more! Precious metals, or commodities, have a history dating back to the Great Depression. Let’s take gold, for example.
You probably already have gold pieces fashioned into jewelry, whether a watch, earrings, necklace, bracelet, etc. That’s a start! Now let’s dig deeper. When investing in gold, you can:
- Purchase bullion or physical gold bars and coins. This means you’ll need space around your home to store it and keep it safe.
- Purchase securities. If keeping physical gold is not your style, seek out stocks, bonds, and gold futures instead.
Both options diversify your investment portfolio and act as a hedge against inflation. What does that mean? As inflation hits, the value of precious metals follows suit.
So even if other investing activities dive into the market, your precious metals should balance things out.
High Yield Savings Accounts
The glory and the glamor for those risk-averse folks can survive through the use of high yield savings accounts.
What’s the difference between a high yield savings account and that of a common savings account? The amount of interest earned on your investment. There are also fewer overhead costs associated with the accounts, leaving your money more room to grow.
Do you dream of adding “landlord” to your title? Real estate is another avenue of investing.
This is another form of investment with options:
- To physically own a piece of property, manage it, and collect rent.
- To purchase a piece of property and flip it on the market.
- To own real estate investment trusts or REITs.
Each has its strengths and boils down to what fits your overall financial goal and strategy.
What To Consider Before Investing
Stop and reflect on the future before you reach out to a financial advisor or begin stuffing your cash into investment options.
What do your long-term financial goals and needs look like? Do you have a roadmap? If not, get started now and write it down. Don’t walk into the world of investing without having some type of strategy to refer to.
Sure, the strategy may be updated and modified many times along the way, but at least you’ll have something on paper to keep you motivated and your investments following the proper path.
So what are some things you should include in your financial strategy or investment plan?
Investing money towards your future is a great concept if you can afford it. So before you begin, how about creating a budget? This helps guide you in the present and build out your future growth. You can’t invest for tomorrow with money you don’t have today.
Embedded into your budget should be your rainy day fund. This is a reserve fund for unplanned events because guess what? They happen! Take the effects of the pandemic as a prime example.
Without a rainy day fund, the money you invest will most likely be cashed in towards those unexpected expenses and never grow.
Assess Your Risk Level - How Much Are You Willing To Accept?
Be realistic and honest with yourself, and prepare yourself as you walk into the world of investing. No matter what, the value of your portfolio over time is destined to have peaks and values. The end goal? To keep the peak, especially when it’s time for your future self to liquidate those investments.
Keep Your Portfolio Diversified
Diversifying your portfolio can mitigate your level of risk. Don’t draw all of your attention to one particular asset type.
Allocate it across them all, including stocks, bonds, real estate investments, mutual funds, exchange-traded funds, and more.
Once your funds are allocated, then focus on diversifying. For example, when investing in stocks, move your money across different categories. Leaving your money in one basket is not the best method to return your investment.
The Bottom Line
Congratulations on taking the first step and learning more about what investing activities are and the options out there. You are on the right track to building your financial future.
The right investment option is out there, and it’s calling your name. Everyone’s situation is different, so don’t compare but build your portfolio. Keep it diversified, too, balancing it between those that may feel risky to you and those that strongarm economic factors such as inflation.
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