You want to invest and you have enough money to do so. Well, it's time to decide what investment tool to choose. This is an important step which will determine your entire future strategy. We will guide you through the most important options.
Evaluation criteria
There are several criteria that are used for the purpose of investment instrument’s evaluation. Learning about them early on can be beneficial for a beginner investor. It would be easier to compare different investment tools when using a well-determined set of criteria.
The criteria for evaluating the attractiveness of investment instruments are as following:
- Risk. All assets can be divided into three main categories: high-risk, medium-risk and low-risk. The risk is a probability to not make a profit or even lose money when the prediction comes false. For medium-risk and low-risk assets, this probability is lower. But if there are assets with low risk, why to choose high-risk ones? The thing is profitability directly correlated to risk. The higher the risk the more you can potentially earn.
- Profitability. Your return on investment can differ, as well: being either low and stable or high and situational. Each investor’s desire is to find an asset with low risk, high and stable profitability, but that sounds too much like a fairytale.
- Required qualifications. Any rational investment requires substantial preparation. Some tools, however, will require a professional background to start making money (Forex is one of them), while the others are much easier for a rookie to pick up (stock trading).
- Time. Some tools let you earn in a matter of minutes (still, it can or cannot happen). Patience and endurance are the best friends of any investor.
- Required capital. Certainly, in order to receive a tangible return on investment, you need to invest a lot. But even if you start with a small amount of money, minimal investment will differ for different asset types. It is possible to buy $10-worth of shares, but not real estate.
These criteria will help you make a guided decision
Don’t want to take additional risks? Avoid high-risk assets; it would be better for you to look at low-risk instruments. Do you want to become an investment guru? Choose assets that require a long and detailed study, and work towards your goal.
What are the investment tools?
Let's return to the investment tools. For your convenience, we will list the most interesting options and analyze them according to the criteria provided above. Note that here we will not be talking about bank deposits, mutual funds, Forex and binary options as we have already covered the topic in the previous article (link).
Insurance and retirement savings programs
Risk: Low
Profitability: Low
Required qualifications: Not required
Time: The yield on insurance programs is usually paid once a year. For retirement programs, monthly payments are possible
Required capital: $1000+, requires replenishment
Insurance programs do not only financially protect you and your family from unforeseen emergencies, and retirement programs do not only give a guaranteed increase to your income once your career is over — they can also become an investment tool. In general, the yield can be equated to the profitability of a bank deposit. But the initial purpose of these programs (insurance and retirement) gives advantages over the deposit.
Venture investments
Risk: High
Profitability: High income is possible
Required qualifications: Business flair and experience are needed
Time: Ranges from less than a year to a few years
Required capital: Requires a fairly large investment
Venture investment is an investment in projects at a very early stage. What will happen to the project that you have invested in is hard to predict. It can sink or it can swim, multiplying your investment. Should it fail, you will most likely lose your entire investment. Income, in this case, is not received in the form of dividends but rather as a result of share price increase.
Stocks
Risk: Varies
Profitability: Low or medium, stable
Required qualifications: An attentive approach is required at all stages of investment
Time: Takes quite a lot of time to grow, but sharp surges are not ruled out
Required capital: The more you invest, the higher the income. The minimum investment is enough to start with
To invest in stocks successfully you will have to approach the issue responsibly. Studying details, constantly monitoring and evaluating the company is the key. Risks depend greatly on what you invest in. An attentive approach, deep understanding of the corresponding industry are important. More details on how to invest in stocks can be found here on our blog. Stocks are good for both beginners and professional investors.
Bonds
Risk: Low
Profitability: Low or Medium
Required qualifications: An attentive approach is required at all stages of investment
Time: Best if kept longer
Required capital: The bigger the investment, the higher the income. The minimum investment is enough to start with
Due to low risk and fixed interest bonds are sometimes compared to bank deposits. At the same time, bonds, just as stocks, have a price. Low risks associated with bank deposits and growing price make a strong combination. Of course, in the end, the risk is not equal to zero and the income is based on the amount of initial investment. Moreover, bonds need to be babysitted, you cannot buy and forget about them. Still, bonds are not the tool to be looked down at.
PAMM-accounts
Risk: High
Profitability: High
Required qualifications: Special knowledge and education are required
Time: Over 1 month
Required capital: The bigger the investment, the higher the income. Minimum investment is enough to start with
PAMM-account is a Forex-based account, where a dedicated trader uses the funds of his clientele to trade. This investment opportunity is associated with high risk. The sides, however, share not only the potential profit but also loss, which is an apparent advantage.
Exchange-traded fund (ETF)
Risk: Average
Profitability: Average
Required qualifications: An attentive approach is required at all stages
Time: Best if kept longer
Required capital: The bigger the investment, the higher the income. The minimum investment is enough to start with
An exchange-traded fund is a portfolio of assets that consists of several exchange-traded assets: stocks, bonds, etc. The fund is managed by a professional investor. ETF helps to diversify your investments, and at the same time to keep them under control.
Hedge Funds
Risk: High
Profitability: High
Required qualifications: Not required
Time: Different
Required capital: Substantial investment is required
A Hedge Fund is an investment fund that is focused on one of two things: 1) maximizing profitability with a predetermined risk or 2) minimizing risks with a given profitability. A Hedge Fund is an organization with a well-defined structure that generates profit on behalf and for its investors. It can be a lucrative investment opportunity with high enough income. But the lower threshold can easily reach hundreds of thousands of dollars, making it inaccessible for retail investors.
Precious metals
Risk: Low
Profitability: Low
Required qualifications: Not required
Time: Depends on the metal price fluctuations
Required capital: Average
Investments in precious metals usually come as a depersonalized metal account in a bank or a bank deposit in a precious metal. Depersonalized metal accounts allow you to play on precious metal quotes like playing on stock exchanges. A bank deposit in a precious metal is the physical storage of precious metals. Gold is the most popular choice here.
Real estate
Risk: Low
Profitability: High incomes are likely
Required qualifications: Requires a careful study
Time: Takes several years to turn tangible results
Required capital: Downpayment is a required minimum
Investing in real estate is reliable and profitable if a liquid option is chosen. Suchlike investments are suitable for those who are willing to wait and monitor the real estate market. You can invest in apartments and either rent or sell them later. A stable option for those who already have the means to do so.
Own business
Risk: High
Profitability: From negative to high
Required qualifications: Requires special knowledge
Time: 24/7
Required capital: Depending on the idea, scale and niche
Own business is usually the first thing that comes to mind when you get access to additional money. Saying goodbye to the employer and becoming your own boss is the dream of many. But the number of businesses that make it is dwarfed by those who don’t. Remember: even the most encouraging business plan can fail due to seemingly insignificant details. The amount of money at your disposal should be two times as much as what you are planning to spend. On the other hand, even the largest companies at one
Let's summarize
Choosing the right investment tool for you is not an easy task. You need to understand what you want to get with your investment and what you are not afraid to sacrifice. Investment attractiveness criteria will help you carry out the first screening. The choice then will depend only on personal preferences and financial opportunities. If you have forgotten what an investment is and why you need it, we recommend you go back to the material «Investing: key concepts and myths».
