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If you’re looking for a way to improve your financial situation, then investing might be the right solution for you. As with every new investor, however, finding suitable investment vehicles for your risk level and goals can be challenging.
To arrange correct asset allocation, you first need to think about the kind of investor you are, your financial goals, your time horizon and your risk tolerance, as these factors will help you develop your investment strategy.
If you want to build wealth over time, you’ll first need to learn to effectively manage your personal finances, as it will allow you to allocate a portion of your income to savings (and later investments).
High-yield savings accounts, certificates of deposit, and money market accounts are options for beginners and those with a limited amount to invest who like to have their funds easily and quickly accessible.
Saving helps you create emergency funds and reach your short-term goals. Moreover, there is usually no additional cost associated with saving money through dedicated accounts. It is also one of the safest saving options, as deposits in bank accounts are generally automatically insured up to a certain amount. However, some savings products ask for a minimum investment or a minimum balance and might require you to lock in your money for a certain period of time (not forgetting that the potential for return with these types of accounts can be relatively low).
Employer-sponsored retirement plans and individual retirement accounts can be a way to start saving and investing for your retirement, as they bring different kinds of advantages, such as tax breaks, tax and penalty-free withdrawals, tax-free growth, and employers’ contributions, among others.
Companies or governments mostly use bonds as a means of raising capital to finance their growth projects. Rather than approaching a bank for a loan, they issue bonds to raise the necessary funds. In exchange for their investments, they pay bondholders a regular interest rate, often referred to as ‘coupons’. When the bonds reach maturity, the companies or governments that issued them return the principal amount to the investors.
As a specific type of fixed-income investment, bonds are good for providing investors with a steady income flow. The predictability and reliability of bond interest payments make them an attractive option for income-focused investors, and the precise maturity date adds an extra layer of predictability that can be used to make the most of their investment decisions.
Even though you can find different risk levels associated with bonds (investment grade vs. junk bonds, for instance), they are considered a lower-risk investment option compared to other asset classes like the stock market, which means they also offer potentially lower returns.
Passive mutual funds, index funds and ETFs are considered good investment products for diversification, as they usually replicate the value of an underlying market index or a basket of select stocks, offering immediate exposure to a broad range of assets. Instead of actively buying individual stocks, you can simply buy a share of a mutual fund, an index fund or an ETF that’s in line with your risk-return profile.
These investments also come with lower costs for investors than actively managed funds or active trading and are pretty easy to use - all you need is to open a specific investment account and select the right funds for your risk appetite and goals.
Among the different types of investments for beginners we’ve talked about, the stock market is probably the one that offers the highest returns (with correspondingly higher risk). It has indeed historically provided a remarkable rate of return over a long period of time, with an overall upward trajectory despite short-term volatility.
In addition to the capital gains you can potentially make from the difference between the buying and selling prices of shares, you also have the opportunity to earn passive income through dividends if the companies you’re targeting distribute them.
Interested in knowing more about how to buy and trade shares?
FP Markets offers a wide range of financial instruments to trade, including an extensive range of shares and various types of ETFs.
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