Personal finance or Money Management is one of the underrated skills in the world. Our academic curriculums have progressed immensely in science and arts, and they are still evolving. But the teaching in the domain of personal finance is not relevant to match the reality of the financial world. Students learn the bare minimum, yet that is not enough to initiate effective private finance practices. Similarly, it is also essential to ponder that no matter how skillful an individual becomes and earns big bucks if they do not know how to manage them, they will fall behind.
In personal money management, there are many hardcore concepts to learn that can easily shape the destiny of any individual’s financial future. And again, it is not highly dependent on your earning only and how you manage it. One must understand the fundamentals of maximizing earning, making budgets, and reducing the cost of living. But it is the investment skills that can set the financial situation towards greatness over time. Your earning can afford your current lifestyle, but the right investments are the ones that can allow you to afford a lavish lifestyle without the need to earn every day. Therefore, if an individual is not trained enough on investing skills, there are chances that they might not invest at all or fall into the Ponzi schemes or unwanted investment ventures.
When it comes to investment skills, it’s the whole enormous world in itself. It isn’t easy to understand all the concepts, grasp the essentials, and find the best investment avenues in one go. There is much nitty–gritty to look through, and even the seasoned investors find some new element that they don’t know about usually. And usually, the beginners also get trapped in the wrong expectations and fascinations to start with about investments. You can hear specific queries like, “Which stock should I buy to become a Millionaire?” or “What is this ROI thing?” or “What is impact investing?” etc. Therefore, this article cannot suffice all the elements of investing, but will touch some basic types of investment options and will also provide an understanding of the fundamentals that can help in selecting, evaluating, and deciding on the investment option.
Firstly, let’s look at the basic categories or asset classes to understand the investment options available.
Asset Classes:
There are many investment options and opportunities out there, and the list is endless. But, typically, all of such options can be categorized into a handful of categories, commonly known as “Asset Classes.” An Asset Class consists of investment options with similar characteristics and is governed under the same authorities’ rules.
The most common asset classes that people are familiar with are:
Stocks/ Equities
Bonds/ Fixed Income Investments
Alternative Investments like Real Estate, Forex, and Collectibles
Commodities and Futures like Gold, Oil, etc
Sustainable, Responsible and Impactful Investments (SRI)
We will only go into the details of the common ones for the sake of simplicity and basic understanding, and once you understand them, you can move towards the problematic options.
Stock/Equities:
One common type is trading stocks of publicly traded companies. Beginners usually understand it quickly as it is portrayed in news and media immensely. Publicly traded companies offer an investment opportunity to buy equity through purchasing their stock. For example, you might buy 100 shares of a company at $120 if you trade them at $1.12 in the stock market. Companies raise public capital by selling stocks to the public.
Investors can earn a profit on selling stocks when stock prices get increased or decreased as there are buy or sell options on stocks that are also available. Similarly, investors can also earn profit by receiving dividends from the stocks they own. Dividends are a form of interest or bonus that is given over the performance of the company stock. You can look up Dividend.com to search and compare the stocks that offer dividends.
Bonds/Fixed Investments:
These investments refer to investment in debt securities that provide fixed interest payments over the bond’s life, i.e., debt security. When you buy a bond, you give financing to the government or any company, and in return, you receive interest payment as per the coupon rate. These interests are typically paid semi-annually or annually until the bond’s life when the principal amount is paid back in full.
As the interest rates fluctuate, it doesn’t make any difference in the interest payments, but the bond’s value can vary. As the interest rate falls, the value of the bond increases vice-versa. Holding a bond for its whole life doesn’t create much difference and earning.
All the other classes have their fundamentals to be studied and understood. Therefore it is suggested to master the two above and build your knowledge base as you feel in control.
Let’s look at some of the investment fundamentals to evaluate any investment option and make the decisions accordingly.
Risk and Opportunity:
The primary and foremost important fundamental is the understanding of risk and opportunity and their relationship. You can earn higher returns on asset classes, which are prone to the risk of losing too. Similarly, if you like safe investments, you can make better in fixed investments, but your returns will be lesser than the average market returns. Therefore, it is essential to be mindful of your risk appetite and set the expectations accordingly.
Technical and Fundamental Analysis:
Seasoned investors usually invest based on their technical and fundamental analysis. One of them is better is debatable, and experts haven’t put the final word about it better. However, we can say that both have their own set of utilities.
For our understanding, Fundamental Analysis relies on the macro development of the economy of the country. For example, the decisions depend on the country’s inflation index, the Producer Price Index (PPI), etc. Hence, they evaluate the investment opportunity or stock’s Earning Per share based on its economic condition.
Whereas, Technical Analysis relies on the stock market condition or the technical industry analysis. These depend on the market, industry analysis, etc.
Conclusion:
Learning is a lifelong virtue, and in the long run, people with better learning and risk appetite end up with more wealth. Therefore, one can state with ease that the best investment option is investing in your learning.