Posted in Stock Market | March 20th, 2008 | by Jordan
Google has been very quick to respond to the overall markets, it seems as though it is easily affected by the market rather than its own inner workings. The company topped out last November with a share price of $750 only to find itself to be at $430 just four months later.
Prior to the fallout from $750, Google had never managed a significant move down. A quick look at a Google chart will show that the price has never made significant, quick drops but rather rose at a very linear pace until November, where it began to spike. This tells us that the spike was due to mal-investment that led to large profit-taking and short selling. Google’s drop in price has very little to do with the internal workings of Google and more to do with trading. Traders were quick to drive the price up then back down, something that hadn’t happened in the two years prior.
Now that Google has shed about 40% of its value, this might be the place to buy in. For the first time, Google trades at just 32 times earnings with a PEG ratio of .61. It is very rare that you every get into a growing internet company with a 53% growth rate for just 32 times next years earnings. At this rate, Google is set to reach a blue-chip PE level within the next couple years.
While the world might be entering a recession, internet traffic is not slowing, nor is the need to advertise on the internet. Google boasts low overhead costs and is very well prepared to continue working even through economic slowdown. Its ad sense program extends all over the internet and the world, profiting from the day to day currency flux.
Large offers for Yahoo make Google look even more attractive. Microsoft and Yahoo have yet to even come close to Google in textual advertising. Yahoo has produced a similar program but has been in beta for two years while MSNs marketing program never really gained traction. Google has the key to the text based advertising market and is unlikely to give it up.
All in all, Google looks like a great investment. A PE ratio of 32 and growth rates in the 50s tell us this is one for the long term. Look to buy on the dips at this price.
Investing in the Chinese Yuan
Posted in Forex | March 26th, 2008 | by Jordan
The Yuan or Renminbi is the Chinese currency and might as well be the next hot investment. The run into metals, commodities, oil and the Eurozone has brought huge gains to those areas, but the Chinese Yuan is something that has yet to be exploited.
The Renminbi was subject to a peg to the dollar for decades. The old peg was valued at about 8 Renminbi to one US Dollar and was in effect to keep a low Chinese currency value. If the currency was always devalued against the dollar, US consumers would look first to China for the production of goods. Thus so many “Made in China” stickers appear on virtually everything you own. The drop in the dollar’s value went unnoticed against the Yuan because its always been pegged to the US Dollar. Never has it been allowed to free float against the USD so its value has remained the same. Lately, the Yuan has been on top of the headlines as the main reason for the large trade deficit between the United States and China.
Now that the economy is on the forefront of political discussion it has been made public that US legislators are looking for a way to let the Yuan free-float against the value of the dollar to bring back the manufacturing base to the United States. The currency is being artificially devalued in an attempt to keep China’s booming manufacturing district, well, booming.
One proposal was to create an import tax on Chinese goods to make them more expensive to US consumers and thus, force companies to send the manufacturing jobs back home. In response, China allowed its currency to now float against a “basket” of different currencies including the pound, euro, and 6 other large currencies. At the font of the basket is around a trillion dollars worth of US Treasuries which has for the most part maintained the value of the Yuan to about 7 Yuan to the dollar.
If the market were to let the Reminbi free-float, an instant 30-40% correction is expected. Economists predict that the value of the Yuan would jump quickly to 4-5 Reminbi to the dollar, instead of today’s value of around 7 to the dollar.
It is certain that the Yuan will eventually be set to free float. The new tax legislation and pressure from the rest of the world to go to a floating currency will eventually send China to let the currency float. When it does, huge overnight gains will occur for anyone with a position in the Chinese currency.
Everyone should have some exposure to the currency market by making a direct investment into the currency, buying Chinese stock such as Petrochina or taking a position on the spot markets. I would recommend making an investment on the spot markets through Oanda forex. With Oanda, it is possible to enter a position at 30:1 leverage, meaning it will only cost $100 to control $3000 of currency. A modest investment of $1000 to buy $15000 in Reminbi would be suggested as this provides a position against the currency and provides a great return if the Reminbi does get revalued.
A move from 7:1 to 5:1 would mean that the value of your investment ($1000) would turn into $5500 if the currency was revalued to 5 Yuan to the dollar. Using $1000 to buy $15000 in Reminbi has a huge upside potential with the only possible loss of $1000. Get in, its inevitable.
The Yuan or Renminbi is the Chinese currency and might as well be the next hot investment. The run into metals, commodities, oil and the Eurozone has brought huge gains to those areas, but the Chinese Yuan is something that has yet to be exploited.
The Renminbi was subject to a peg to the dollar for decades. The old peg was valued at about 8 Renminbi to one US Dollar and was in effect to keep a low Chinese currency value. If the currency was always devalued against the dollar, US consumers would look first to China for the production of goods. Thus so many “Made in China” stickers appear on virtually everything you own. The drop in the dollar’s value went unnoticed against the Yuan because its always been pegged to the US Dollar. Never has it been allowed to free float against the USD so its value has remained the same. Lately, the Yuan has been on top of the headlines as the main reason for the large trade deficit between the United States and China.
Now that the economy is on the forefront of political discussion it has been made public that US legislators are looking for a way to let the Yuan free-float against the value of the dollar to bring back the manufacturing base to the United States. The currency is being artificially devalued in an attempt to keep China’s booming manufacturing district, well, booming.
One proposal was to create an import tax on Chinese goods to make them more expensive to US consumers and thus, force companies to send the manufacturing jobs back home. In response, China allowed its currency to now float against a “basket” of different currencies including the pound, euro, and 6 other large currencies. At the font of the basket is around a trillion dollars worth of US Treasuries which has for the most part maintained the value of the Yuan to about 7 Yuan to the dollar.
If the market were to let the Reminbi free-float, an instant 30-40% correction is expected. Economists predict that the value of the Yuan would jump quickly to 4-5 Reminbi to the dollar, instead of today’s value of around 7 to the dollar.
It is certain that the Yuan will eventually be set to free float. The new tax legislation and pressure from the rest of the world to go to a floating currency will eventually send China to let the currency float. When it does, huge overnight gains will occur for anyone with a position in the Chinese currency.
Everyone should have some exposure to the currency market by making a direct investment into the currency, buying Chinese stock such as Petrochina or taking a position on the spot markets. I would recommend making an investment on the spot markets through Oanda forex. With Oanda, it is possible to enter a position at 30:1 leverage, meaning it will only cost $100 to control $3000 of currency. A modest investment of $1000 to buy $15000 in Reminbi would be suggested as this provides a position against the currency and provides a great return if the Reminbi does get revalued.
A move from 7:1 to 5:1 would mean that the value of your investment ($1000) would turn into $5500 if the currency was revalued to 5 Yuan to the dollar. Using $1000 to buy $15000 in Reminbi has a huge upside potential with the only possible loss of $1000. Get in, its inevitable.
The dollar as a carry trade
Posted in Uncategorized, Forex | April 1st, 2008 | by Jordan
Last year brought much news about the USDJPY carry trade, or holding a trade merely to gain interest. At the time, the Japanese lending interest was far below the borrowing interest paid by US banks, investors could simply borrow in Japanese yen to deposit into US accounts and make money on the interest.
Carry trades are usually highly leveraged, forex accounts allow up to 400:1 leverage at some brokers. This kind of leverage allows an individual to control $1,000,000 in currency with just $250 down. This kind of investing is very dangerous and also compounds the effect when the markets turnover, or the trade becomes unprofitable for carry trade investors.
The dollar faces a critical problem, at this point the Federal Reserve Board is pushing rates so low that it may soon be privy to being the new carry trade currency. This has already happened with the Eurozone and the pound as the dollar is now pushing low interest rates that are a few points lower than the central bank rates in other countries. This creates unnecessary selling pressure when investors go to sell dollars and buy other currencies to profit from the interest rate difference.
When the USDJPY carry trade broke down, investors quickly bought back Japanese Yen to cover positions. This caused the yen to advance by 20% in 2007. As rates were lowered and investors lost confidence, the dollar was sold to buy yen which moved the exchange rate from 120 yen to the dollar to less than 100.
This puts a daunting strain on an already hurting US Dollar. If the same carry trade that perpetuated with the yen persists in the opposite direction with the Euro and GBP, the value of the dollar will continue to slide. In this kind of position, investors borrow dollars to deposit in Euro banks. This puts artificial selling pressure on the value of the US Dollar, causing it to correct.
Further action by the Federal Reserve to cut interest rates will only hurt the dollars value, pump up the price of commodities and cause a dollar sell off in favor of other currencies. The difference between interest rates is still tight, but a further move of 50 or 75 basis points will be the beginning of a large, multi-year carry trade. We’ll have to see how the Fed responds, surely they know that further action will create a large difference in interest rates and more selling pressure.
Last year brought much news about the USDJPY carry trade, or holding a trade merely to gain interest. At the time, the Japanese lending interest was far below the borrowing interest paid by US banks, investors could simply borrow in Japanese yen to deposit into US accounts and make money on the interest.
Carry trades are usually highly leveraged, forex accounts allow up to 400:1 leverage at some brokers. This kind of leverage allows an individual to control $1,000,000 in currency with just $250 down. This kind of investing is very dangerous and also compounds the effect when the markets turnover, or the trade becomes unprofitable for carry trade investors.
The dollar faces a critical problem, at this point the Federal Reserve Board is pushing rates so low that it may soon be privy to being the new carry trade currency. This has already happened with the Eurozone and the pound as the dollar is now pushing low interest rates that are a few points lower than the central bank rates in other countries. This creates unnecessary selling pressure when investors go to sell dollars and buy other currencies to profit from the interest rate difference.
When the USDJPY carry trade broke down, investors quickly bought back Japanese Yen to cover positions. This caused the yen to advance by 20% in 2007. As rates were lowered and investors lost confidence, the dollar was sold to buy yen which moved the exchange rate from 120 yen to the dollar to less than 100.
This puts a daunting strain on an already hurting US Dollar. If the same carry trade that perpetuated with the yen persists in the opposite direction with the Euro and GBP, the value of the dollar will continue to slide. In this kind of position, investors borrow dollars to deposit in Euro banks. This puts artificial selling pressure on the value of the US Dollar, causing it to correct.
Further action by the Federal Reserve to cut interest rates will only hurt the dollars value, pump up the price of commodities and cause a dollar sell off in favor of other currencies. The difference between interest rates is still tight, but a further move of 50 or 75 basis points will be the beginning of a large, multi-year carry trade. We’ll have to see how the Fed responds, surely they know that further action will create a large difference in interest rates and more selling pressure.
Market timing
Posted in Investing | April 7th, 2008 | by Jordan
The sentiment that the market always goes up has long been in play and is still the fact used by most professional money managers to assume positions in beaten down companies. The average is about 10.5% a year for large cap stocks over the long run, some 100+ years.
Market timing is something that is critical for a short term trader and not so necessary to the retirement fund manager. The short term trader needs to show huge daily profits from relatively small movements in price. A move from $25 a share to $26 would be a gift from the heavens for most full time traders. For the long term investor, that’s just a 4% return, very unlikely to make a considerable difference in the long run.
When the markets get beaten down, look at the last few months, the new favorite term is “timing the market.” Many investors tried to time the real estate market only to get trounced, many ran out the commodity boom and the USDJPY carry trade watched their profits unravel as it broke down. Market timing can be a difficult thing to learn but can bring huge gains for correct timing. The losses can be huge as the gains, many investors lose big by chasing returns.
Short term traders do not profit from the difference in value in a company, they profit by merely buying X stock and selling it for more than they paid. Traders, unlike investors, just want to flip their shares for a profit rather than hold on for the long term. For this reason, data such as corporate earnings and economic outlooks play a very minor role in the short term trader. Long term analysis is unlikely to affect a trader’s short term perspective.
For the rest of us, market timing really isn’t that critical. As much as we’d like to follow the world’s best investments and be invested in each of them, its entirely impossible. Most of us have our retirement portfolios invested into a series of profitable companies rather than the hot biotech down the street.
There is some role for market timing in a bear market, especially for the long term investor. A bear market is likely to bring down the values of all stocks, even those with strong fundamentals. A boring market in the US looks like a great opportunity for foreign countries. Fundamentals remain strong even amongst this very technical-driven investment cycle.
As things weaken on the American front, there are still many great investments that have become oversold due to market sentiment rather than an actual difference in company quality. Take for instance the deep-discounters, the fall in prices was due mostly to a market event than an internal event. If anything, the balance sheets of deep-discounting corporations have never looked better.
And as much as the market hates the financial sector as a whole, there are still many great investments. Firms with limited exposure to subprime mortgages have been hit just as hard as those with maximum exposure. The rebound for these companies who managed their investments wisely will be huge, driven by profits rather than the rumor-mill. Just by being in the financial industry it is likely to see a stock price tank by 20-30% without any hard evidence that the company will be doing worse. This kind of sentiment is easy to beat with high quality, profitable stocks which are still lingering in the mess of illiquid lenders.
The sentiment that the market always goes up has long been in play and is still the fact used by most professional money managers to assume positions in beaten down companies. The average is about 10.5% a year for large cap stocks over the long run, some 100+ years.
Market timing is something that is critical for a short term trader and not so necessary to the retirement fund manager. The short term trader needs to show huge daily profits from relatively small movements in price. A move from $25 a share to $26 would be a gift from the heavens for most full time traders. For the long term investor, that’s just a 4% return, very unlikely to make a considerable difference in the long run.
When the markets get beaten down, look at the last few months, the new favorite term is “timing the market.” Many investors tried to time the real estate market only to get trounced, many ran out the commodity boom and the USDJPY carry trade watched their profits unravel as it broke down. Market timing can be a difficult thing to learn but can bring huge gains for correct timing. The losses can be huge as the gains, many investors lose big by chasing returns.
Short term traders do not profit from the difference in value in a company, they profit by merely buying X stock and selling it for more than they paid. Traders, unlike investors, just want to flip their shares for a profit rather than hold on for the long term. For this reason, data such as corporate earnings and economic outlooks play a very minor role in the short term trader. Long term analysis is unlikely to affect a trader’s short term perspective.
For the rest of us, market timing really isn’t that critical. As much as we’d like to follow the world’s best investments and be invested in each of them, its entirely impossible. Most of us have our retirement portfolios invested into a series of profitable companies rather than the hot biotech down the street.
There is some role for market timing in a bear market, especially for the long term investor. A bear market is likely to bring down the values of all stocks, even those with strong fundamentals. A boring market in the US looks like a great opportunity for foreign countries. Fundamentals remain strong even amongst this very technical-driven investment cycle.
As things weaken on the American front, there are still many great investments that have become oversold due to market sentiment rather than an actual difference in company quality. Take for instance the deep-discounters, the fall in prices was due mostly to a market event than an internal event. If anything, the balance sheets of deep-discounting corporations have never looked better.
And as much as the market hates the financial sector as a whole, there are still many great investments. Firms with limited exposure to subprime mortgages have been hit just as hard as those with maximum exposure. The rebound for these companies who managed their investments wisely will be huge, driven by profits rather than the rumor-mill. Just by being in the financial industry it is likely to see a stock price tank by 20-30% without any hard evidence that the company will be doing worse. This kind of sentiment is easy to beat with high quality, profitable stocks which are still lingering in the mess of illiquid lenders.
How, When And Where To Invest
Many people are scared of investing. They prefer the safety of leaving their cash in a bank or building society. While it's true you won't see the value of your savings lurch up and down on a daily basis, we're going to show why failing to invest can cost you money in the long term. And we're not talking about a few pence, we're talking about thousands and thousands of pounds!
The five main types of asset
First of all, let's look at the five main types of asset you can park your dosh in:
Cash (e.g. a savings account with a bank or building society);
Bonds (e.g. a loan to the government or a large company);
Property (e.g. residential or commercial property);
Equities (e.g. shares in companies such as BP or Vodafone); and
Commodities (e.g. copper, oil or coffee)
A general rule of thumb is that the riskier an asset is, the greater return you'd expect to earn from it over the long term. We're going to talking a lot about the "long term" in this guide - generally it means five years or more.
Cash is generally considered to be the safest asset, but it also likely to give you the lowest return over a period of several years or more. Bonds are slightly more risky than cash but normally generate roughly the same level of long-term returns. Property tends to do well over long periods and the returns are quite stable. The returns from equities and commodities vary the most from year to year, but tend to be highest of all over long periods.
As an example of the difference in volatility, here in the UK, the real annual return of cash over the last 100 years (i.e. the annual return after taking off inflation) has been primarily between minus 5% and plus 8%. For equities, the majority of annual returns for the last 100 years fall between minus 15% and plus 25% and the chances of losing money in any individual year has been approximately one in four.
Long-term returns
To illustrate what effect this can have, let's look at some numbers. Here is the average annual return for cash, equities and gilts over the last fifty years (note that gilts are the main type of bond in the UK, being a loan to government). The figures are taken from the Equity Gilt Study produced by Barclays Capital.
Now we're talking. Investing in equities would have resulted in almost nine times the amount you would have got from gilts or cash! And remember that these figures are after inflation, meaning the buying power of your initial £1,000 would have increased 24-fold over the course of the last fifty years.
No one knows what will happen in the next fifty years of course. However, these figures span numerous wars, recessions, shocks and other crises. We think they provide the best guide to what sort of returns to expect in the future as well.
A key point to recognise here is that if you want to earn a high rate of return, i.e. higher than you'd typically get from a savings account, you need to accept some risk. That means getting comfortable with the fact that your investments will go down in value some of the time.
When To Invest
That's all very well, you might say, but I don't have fifty years to invest. However, you might if you've just started work and you're looking to invest for your retirement. But investing in shares also works well over shorter periods, too.
Turning to figures from Barclays Capital again, we can see that shares have beaten cash the majority of the time over shorter periods as well.
Even over a period as short as two years, the chances of shares beating cash are two in three. However, most people, ourselves included, advise that you shouldn't invest in shares for any period shorter than five years. The rationale is that the chances of losing money less than five years, while fairly small, are still quite significant.
For example, there have been two occasions in the past 100 years where shares have fallen three years in succession. So you're usually better off sticking to cash if you have definite plans for your money in the next five years (to put down a deposit on a house for example).
So when should you invest? The earlier the better. It's advisable to keep a portion of your money in cash, in case of emergencies. Three to six months' salary is a good guide as this is often the period you'll need cover before any insurance policies you may have start to pay out.
Once you have an emergency fund in place, the longer you give yourself to invest, the greater your returns are likely to be. So invest as soon as you can. There is a risk that you will invest just before stock market takes a tumble. There is very little you can do about this. No one knows where share prices will go in over the next minute, day or month. All we do know is that the long-term direction of the stock market is up - but it's not a straight line!
In practice, you're unlikely to invest all your money at one particular point in time. It's far more likely that you'll invest small amounts of money on a regular basis. So while you might see immediate stock market falls some of the time, most of the time this won't be the case.
What about property and commodities?
The more observant among you may have noticed that we seem to have lost two asset classes in the last few paragraphs, namely property and commodities.
There a few reasons for this. First of all, annual return figures for shares are a lot easier to measure. Property figures are complicated by factors such as rent and how to account for maintenance costs.
It's also a lot easier to buy and sell share-based investments, as we'll see later. You can't just sell one room of a house for example and property transactions can take months to complete.
The indications are that investing in property and commodities is likely to give you a similar long-term return to equities. So all three types of asset are well suited to long-term investment plans.
Property investing, via buy-to-let, is obviously very popular at the moment and benefits from the fact you can 'gear up' your investment by putting down a small deposit and borrowing the balance of the price. This can magnify your returns over the long term although it does add additional risk as you have to continue to find money to pay interest on what you borrow. Property does have another advantage over equities in that returns tend to be less volatile and it has been much rarer for it to fall in value over the course of any given year.
Commodities are somewhat of a curiosity. They tend to have long periods of poor returns followed long periods of good returns. After many years in the wilderness, they have recently undergone a resurgence - the spectacular rise in the price of oil is an excellent example.
The best way to invest in shares
The main reason the Motley Fool favours shares as a type of investment is ease of use. You can buy and sell quickly and cheaply and in more or less any amount you want.
So how do you get involved? You can invest directly, buying and selling shares in individual companies such as BP and Vodafone. If you have the time, and lots of discipline, this can be best way to go (and you can find out more in our guide called "How To Profit From Shares").
Many people feel more comfortable getting a fund manager to do the investing for them. You can get funds that invest in particular markets such as the UK, US or the Far East. You can also get funds that invest in certain types of industries, such as biotech or mining. You can get even funds that just invest in smaller companies (as there some who believe that small companies offer greater potential returns).
As a rule you pay up to 5% as an initial fee when you invest and around 1.5% each year to the people who manage these funds. There is a cheaper alternative - you can invest in funds where the decisions about where and when to invest are made automatically according to a strict set of guidelines and not by an overpaid fund manager!
Typically, these sorts of funds, called index trackers, will cost you nothing in initial charges and around 0.5% a year. Over the course of, say, twenty years these lower charges mean you end up keeping a lot more of your money.
Using the average real annual return of 6.6% mentioned above, and adjusting for the costs mentioned above, £1,000 invested in an ordinary fund would give you £2,570. In an index tracker you'd end up with £3,268, i.e. 27% more.
Lower charges mean index trackers perform better than most other funds (often called managed funds). Indeed, over a period of five years, an index tracker is likely to beat 75% to 80% of other funds. Over longer period it's likely to do even better.
Avoid tax with an ISA
If you want to get the most from your investments, then it pays to make sure the taxman doesn't get his greedy paws on your money.
You can do this quite simply with an Individual Savings Account, or ISA for short. An ISA is essentially a tax-protective wrapper that you put around an investment, such as an index tracker. While your investment is within this wrapper you won't have to pay any income or capital gains tax. Fantastic!
Under current rules, you can invest up to £7,000 each tax year in an ISA (tax years run from April 6 to April 5). You can find out more about ISAs here.
You can also get some tax relief on your investments by putting them in a pension. Pensions are less flexible than ISAs, particularly when it comes to getting your money but most people are allowed to put more than the £7,000 ISA limit in them each year.
A few words on asset allocation
Many advisers have strong views on how investors should allocate their assets, meaning what proportion they should put into cash, bonds, shares and so on. One approach is that the percentage of your portfolio that should be invested in bonds should match your age. So at age 30, you should have 30% in bonds, and at age 40, 40% and so on.
Here at the Fool, we're not overly fond of these sorts of rules. For starters, bonds have proved to be poor long-term investments, even though they have done well over the last decade or so (for more info on bonds, see this detailed guide). Secondly, constantly adjusting your portfolio in this manner racks up a lot of unnecessary charges.
That's it for this introductory guide on how, when and where to invest. If you're interested in learning more about index trackers then read this guide. If you fancy getting your hands a little dirtier and buying shares in individual companies, read 'How To Profit From Shares'.
The five main types of asset
First of all, let's look at the five main types of asset you can park your dosh in:
Cash (e.g. a savings account with a bank or building society);
Bonds (e.g. a loan to the government or a large company);
Property (e.g. residential or commercial property);
Equities (e.g. shares in companies such as BP or Vodafone); and
Commodities (e.g. copper, oil or coffee)
A general rule of thumb is that the riskier an asset is, the greater return you'd expect to earn from it over the long term. We're going to talking a lot about the "long term" in this guide - generally it means five years or more.
Cash is generally considered to be the safest asset, but it also likely to give you the lowest return over a period of several years or more. Bonds are slightly more risky than cash but normally generate roughly the same level of long-term returns. Property tends to do well over long periods and the returns are quite stable. The returns from equities and commodities vary the most from year to year, but tend to be highest of all over long periods.
As an example of the difference in volatility, here in the UK, the real annual return of cash over the last 100 years (i.e. the annual return after taking off inflation) has been primarily between minus 5% and plus 8%. For equities, the majority of annual returns for the last 100 years fall between minus 15% and plus 25% and the chances of losing money in any individual year has been approximately one in four.
Long-term returns
To illustrate what effect this can have, let's look at some numbers. Here is the average annual return for cash, equities and gilts over the last fifty years (note that gilts are the main type of bond in the UK, being a loan to government). The figures are taken from the Equity Gilt Study produced by Barclays Capital.
Now we're talking. Investing in equities would have resulted in almost nine times the amount you would have got from gilts or cash! And remember that these figures are after inflation, meaning the buying power of your initial £1,000 would have increased 24-fold over the course of the last fifty years.
No one knows what will happen in the next fifty years of course. However, these figures span numerous wars, recessions, shocks and other crises. We think they provide the best guide to what sort of returns to expect in the future as well.
A key point to recognise here is that if you want to earn a high rate of return, i.e. higher than you'd typically get from a savings account, you need to accept some risk. That means getting comfortable with the fact that your investments will go down in value some of the time.
When To Invest
That's all very well, you might say, but I don't have fifty years to invest. However, you might if you've just started work and you're looking to invest for your retirement. But investing in shares also works well over shorter periods, too.
Turning to figures from Barclays Capital again, we can see that shares have beaten cash the majority of the time over shorter periods as well.
Even over a period as short as two years, the chances of shares beating cash are two in three. However, most people, ourselves included, advise that you shouldn't invest in shares for any period shorter than five years. The rationale is that the chances of losing money less than five years, while fairly small, are still quite significant.
For example, there have been two occasions in the past 100 years where shares have fallen three years in succession. So you're usually better off sticking to cash if you have definite plans for your money in the next five years (to put down a deposit on a house for example).
So when should you invest? The earlier the better. It's advisable to keep a portion of your money in cash, in case of emergencies. Three to six months' salary is a good guide as this is often the period you'll need cover before any insurance policies you may have start to pay out.
Once you have an emergency fund in place, the longer you give yourself to invest, the greater your returns are likely to be. So invest as soon as you can. There is a risk that you will invest just before stock market takes a tumble. There is very little you can do about this. No one knows where share prices will go in over the next minute, day or month. All we do know is that the long-term direction of the stock market is up - but it's not a straight line!
In practice, you're unlikely to invest all your money at one particular point in time. It's far more likely that you'll invest small amounts of money on a regular basis. So while you might see immediate stock market falls some of the time, most of the time this won't be the case.
What about property and commodities?
The more observant among you may have noticed that we seem to have lost two asset classes in the last few paragraphs, namely property and commodities.
There a few reasons for this. First of all, annual return figures for shares are a lot easier to measure. Property figures are complicated by factors such as rent and how to account for maintenance costs.
It's also a lot easier to buy and sell share-based investments, as we'll see later. You can't just sell one room of a house for example and property transactions can take months to complete.
The indications are that investing in property and commodities is likely to give you a similar long-term return to equities. So all three types of asset are well suited to long-term investment plans.
Property investing, via buy-to-let, is obviously very popular at the moment and benefits from the fact you can 'gear up' your investment by putting down a small deposit and borrowing the balance of the price. This can magnify your returns over the long term although it does add additional risk as you have to continue to find money to pay interest on what you borrow. Property does have another advantage over equities in that returns tend to be less volatile and it has been much rarer for it to fall in value over the course of any given year.
Commodities are somewhat of a curiosity. They tend to have long periods of poor returns followed long periods of good returns. After many years in the wilderness, they have recently undergone a resurgence - the spectacular rise in the price of oil is an excellent example.
The best way to invest in shares
The main reason the Motley Fool favours shares as a type of investment is ease of use. You can buy and sell quickly and cheaply and in more or less any amount you want.
So how do you get involved? You can invest directly, buying and selling shares in individual companies such as BP and Vodafone. If you have the time, and lots of discipline, this can be best way to go (and you can find out more in our guide called "How To Profit From Shares").
Many people feel more comfortable getting a fund manager to do the investing for them. You can get funds that invest in particular markets such as the UK, US or the Far East. You can also get funds that invest in certain types of industries, such as biotech or mining. You can get even funds that just invest in smaller companies (as there some who believe that small companies offer greater potential returns).
As a rule you pay up to 5% as an initial fee when you invest and around 1.5% each year to the people who manage these funds. There is a cheaper alternative - you can invest in funds where the decisions about where and when to invest are made automatically according to a strict set of guidelines and not by an overpaid fund manager!
Typically, these sorts of funds, called index trackers, will cost you nothing in initial charges and around 0.5% a year. Over the course of, say, twenty years these lower charges mean you end up keeping a lot more of your money.
Using the average real annual return of 6.6% mentioned above, and adjusting for the costs mentioned above, £1,000 invested in an ordinary fund would give you £2,570. In an index tracker you'd end up with £3,268, i.e. 27% more.
Lower charges mean index trackers perform better than most other funds (often called managed funds). Indeed, over a period of five years, an index tracker is likely to beat 75% to 80% of other funds. Over longer period it's likely to do even better.
Avoid tax with an ISA
If you want to get the most from your investments, then it pays to make sure the taxman doesn't get his greedy paws on your money.
You can do this quite simply with an Individual Savings Account, or ISA for short. An ISA is essentially a tax-protective wrapper that you put around an investment, such as an index tracker. While your investment is within this wrapper you won't have to pay any income or capital gains tax. Fantastic!
Under current rules, you can invest up to £7,000 each tax year in an ISA (tax years run from April 6 to April 5). You can find out more about ISAs here.
You can also get some tax relief on your investments by putting them in a pension. Pensions are less flexible than ISAs, particularly when it comes to getting your money but most people are allowed to put more than the £7,000 ISA limit in them each year.
A few words on asset allocation
Many advisers have strong views on how investors should allocate their assets, meaning what proportion they should put into cash, bonds, shares and so on. One approach is that the percentage of your portfolio that should be invested in bonds should match your age. So at age 30, you should have 30% in bonds, and at age 40, 40% and so on.
Here at the Fool, we're not overly fond of these sorts of rules. For starters, bonds have proved to be poor long-term investments, even though they have done well over the last decade or so (for more info on bonds, see this detailed guide). Secondly, constantly adjusting your portfolio in this manner racks up a lot of unnecessary charges.
That's it for this introductory guide on how, when and where to invest. If you're interested in learning more about index trackers then read this guide. If you fancy getting your hands a little dirtier and buying shares in individual companies, read 'How To Profit From Shares'.
How to invest when you're broke - MSN Money
Even if you're barely getting by, investing small amounts in mutual funds can pay off over the long run. Here's how to do it, plus a list of fund companies that accept small investors.
By Harry Domash
How do you start investing if you're barely scraping by?
Say you're making $25,000 a year and know that (along with feeding yourself, paying for gas, rent, etc.) you need to start thinking about your future.
It pays to do that, because even small amounts add up surprisingly fast if you invest on a regular basis. And Uncle Sam will even kick in free money on top of that.
For instance, over the past 10 years, the stock market, at least as measured by the S&P 500 Index ($INX), has returned around 8%, on average, annually. Say you start with nothing and invest only $10 per week. If you pick an investment that only matches the S&P's 8% return, after 10 years, you'd have around $8,000. You have $10,000 if you got lucky and picked an investment that churned out 12% average annual returns.
Even better, if you're a poor person, the government rewards you by refunding as much as half of what you put in. Singles earning up to $15,000, head of households earning up to $22,500 and married joint filers earning up to $30,000 get a credit of 50% of funds contributed to an IRA or 401(k). That means, for instance, if you invested $1,000 in your 401(k) last year and qualified for the credit, your refund would be $500 larger. (A dedicated saver could turn right back around and plow that $500 into a Roth IRA as well.)
One big caveat: Investing in small amounts isn't about investing in individual stocks. All stock investors, no matter how talented, eventually pick a clunker, a stock that drops 25% or 30% before your first cup of coffee in the morning. That's not so bad if you own 20 stocks. But it would be a disaster if you hold only four or five.
Instead, mutual funds and exchange-traded funds make more sense for small investors. Richard Jenkins, editor-in-chief of MSN Money, explains here how to use ETFs. Below, I'll explain how to get started using mutual funds.
Why funds?
For starters, mutual funds give you automatic diversification. Most hold dozens, if not hundreds, of stocks. So, when one goes south, its impact on the portfolio is minimal.
Also, fund managers have advantages over individual investors. It's their day job, and because their trading generates huge commissions, they have access to better information than individual investors.
The problem for small investors is that most mutual funds don't want your money. Why? Simple: Funds get paid by taking a percentage of their investors' money in the form of management fees. It costs them just about as much money to keep track of your account and send you monthly statements as its does for some fat cat that's plunking down $100,000 at a whack.
So most funds establish minimum investing amounts that preclude small investors. Many require you to invest at least $3,000 to open an account, and many ask for much more.
Fortunately, I found a few fund companies (called fund families) that believe the story about small acorns leading to big trees and do welcome beginning investors.
By the way, you have to buy these funds directly from the fund company. Purchasing funds via stockbrokers, even the deep discount types, doesn't work for small investors. Most ask for a substantial check to open accounts. But, that's not a problem. The funds I'm going to describe all accept investments from individuals.
About loads
Before I get into the details, I need to tell you about the difference between load and no-load funds.
Originally, all mutual funds were sold through full-service stockbrokers and financial advisers. Those folks have to get paid, and their commissions are called "loads." Then, in the 1950s, funds that marketed directly to investors began to appear. Since there was no middleman involved, there was no need for the loads, hence the name "no-load" funds.
Loads typically run close to 6% and considerably reduce your return on investment. While it makes sense to pay for good advice, I'm going to show you how to pick your own funds. So there's no point in paying a load.
Automatic payment is key
Only a few fund companies cater to small investors, and for those, agreeing to an automatic investment plan is the key that opens the fund-investing door.
Automatic investing means that you agree to invest a fixed minimum amount every month. However, simply promising doesn't cut it. You have to give the fund company permission to deduct the agreed amount from your bank account.
Each company has its own rules about how much it takes to start a fixed investment plan, and the required monthly investment.
Here's a list of the fund companies I found that accept small investors, and their rules.
Amana funds
Minimum initial investment: $250
Minimum monthly investment: $25
Amana operates two funds, Amana Trust Growth (AMAGX) and Amana Trust Income (AMANX), that invest according to Islamic principles. The funds avoid investing in businesses such as liquor, pornography, gambling and banks. Since collecting interest is prohibited, Amana funds avoid bonds and other fixed-income securities.
Hodges Fund
Minimum initial investment: $250
Minimum monthly investment: $50
Hodges operates a single fund, called simply Hodges Fund (HDPMX).
Steward funds
(formerly Capstone Funds)
Minimum initial investment: $25
Minimum monthly investment: $25
Steward operates four stock and two bond funds following biblical principals and consistent with a Christian lifestyle. The funds avoid investing in companies materially involved in pornography, abortion, alcohol, gambling or tobacco.
TIAA-CREF
Minimum initial investment: $100
Minimum monthly investment: $100
Originally serving only teachers and other public employees, TIAA-CREF operates five stock mutual funds that are open to all investors. Finding them on TIAA-CREF's site is more than a little tricky. From TIAA-CREF's home page, select Fund Research, and then Mutual Funds. Then scroll past Retail Mutual Funds to Retail Class -- Institutional Mutual Funds.
Picking the best funds
Not all funds are created equal, and just because a fund will take your money doesn't make it a good investment. Below are a few measures that will help you pick the best funds. You can do most of your research right here on MSN Money.
Morningstar star rating
Morningstar rates funds by comparing each fund's historical returns (gains) to its historical volatility. The ratings range from one to five stars, where five is best.
Returns reflect how much money you would have made holding the fund for a specific period. Volatility is a measure of how much the fund's share price bounced around along the way. Morningstar's star rating compares each fund's historical returns to it historical volatility. The funds with the highest return to volatility ratios get the highest ratings.
While history is no guarantee, I've found that fund managers with a strong record of outperforming the market tend to continue their winning ways. Start with five-star rated funds. If you find your list is too narrow, consider adding four-star funds, too.
Morningstar risk rating
Risk is the enemy of all investors, small or large. So, I'm going to advise you to check risk two ways, starting with Morningstar's risk rating.
As I mentioned above, Morningstar's overall star rating compares return to volatility. A shortfall of that gauge is that volatile funds can still get high scores if their returns are high enough. By checking Morningstar's risk rating separately, you can rule out funds in that category.
Morningstar separates funds into five risk categories: low, below average, average, above average and high. Avoid "above average" and "high" risk funds.
Standard deviation
Morningstar's risk rating compares a fund's volatility to other funds in its same category (e.g. small-value, banks, tech stocks, etc.). So if a fund is in a volatile category, say technology, Morningstar might rate it as low-risk even though it's risky on an absolute basis.
Standard deviation is similar to Morningstar's risk rating, except it measures historical volatility on absolute basis. By adding standard deviation to the mix, you can rule out Morningstar low-risk-rated funds when they are, in fact, risky.
Standard deviation values run from as low as one to as high as 30 and sometimes higher. The higher the number, the riskier the fund. In my experience, it's best to rule out funds with values above 20.
Most of the fund companies catering to small investors operate only a few funds, so you can check the Morningstar ratings and standard deviation on MSN Money's Fund Portfolio report as I've done here for Vanguard 500 Index (VFINX). As you build your nest egg, diversify your money across different funds to decrease the chance of losing money if one fund happens to go sour.
Editor's note: When originally published, this story incorrectly said minimum investments at Fidelity Investments were as low as $50.
At the time of publication, Harry Domash did not own or control any of the funds mentioned in this article.
By Harry Domash
How do you start investing if you're barely scraping by?
Say you're making $25,000 a year and know that (along with feeding yourself, paying for gas, rent, etc.) you need to start thinking about your future.
It pays to do that, because even small amounts add up surprisingly fast if you invest on a regular basis. And Uncle Sam will even kick in free money on top of that.
For instance, over the past 10 years, the stock market, at least as measured by the S&P 500 Index ($INX), has returned around 8%, on average, annually. Say you start with nothing and invest only $10 per week. If you pick an investment that only matches the S&P's 8% return, after 10 years, you'd have around $8,000. You have $10,000 if you got lucky and picked an investment that churned out 12% average annual returns.
Even better, if you're a poor person, the government rewards you by refunding as much as half of what you put in. Singles earning up to $15,000, head of households earning up to $22,500 and married joint filers earning up to $30,000 get a credit of 50% of funds contributed to an IRA or 401(k). That means, for instance, if you invested $1,000 in your 401(k) last year and qualified for the credit, your refund would be $500 larger. (A dedicated saver could turn right back around and plow that $500 into a Roth IRA as well.)
One big caveat: Investing in small amounts isn't about investing in individual stocks. All stock investors, no matter how talented, eventually pick a clunker, a stock that drops 25% or 30% before your first cup of coffee in the morning. That's not so bad if you own 20 stocks. But it would be a disaster if you hold only four or five.
Instead, mutual funds and exchange-traded funds make more sense for small investors. Richard Jenkins, editor-in-chief of MSN Money, explains here how to use ETFs. Below, I'll explain how to get started using mutual funds.
Why funds?
For starters, mutual funds give you automatic diversification. Most hold dozens, if not hundreds, of stocks. So, when one goes south, its impact on the portfolio is minimal.
Also, fund managers have advantages over individual investors. It's their day job, and because their trading generates huge commissions, they have access to better information than individual investors.
The problem for small investors is that most mutual funds don't want your money. Why? Simple: Funds get paid by taking a percentage of their investors' money in the form of management fees. It costs them just about as much money to keep track of your account and send you monthly statements as its does for some fat cat that's plunking down $100,000 at a whack.
So most funds establish minimum investing amounts that preclude small investors. Many require you to invest at least $3,000 to open an account, and many ask for much more.
Fortunately, I found a few fund companies (called fund families) that believe the story about small acorns leading to big trees and do welcome beginning investors.
By the way, you have to buy these funds directly from the fund company. Purchasing funds via stockbrokers, even the deep discount types, doesn't work for small investors. Most ask for a substantial check to open accounts. But, that's not a problem. The funds I'm going to describe all accept investments from individuals.
About loads
Before I get into the details, I need to tell you about the difference between load and no-load funds.
Originally, all mutual funds were sold through full-service stockbrokers and financial advisers. Those folks have to get paid, and their commissions are called "loads." Then, in the 1950s, funds that marketed directly to investors began to appear. Since there was no middleman involved, there was no need for the loads, hence the name "no-load" funds.
Loads typically run close to 6% and considerably reduce your return on investment. While it makes sense to pay for good advice, I'm going to show you how to pick your own funds. So there's no point in paying a load.
Automatic payment is key
Only a few fund companies cater to small investors, and for those, agreeing to an automatic investment plan is the key that opens the fund-investing door.
Automatic investing means that you agree to invest a fixed minimum amount every month. However, simply promising doesn't cut it. You have to give the fund company permission to deduct the agreed amount from your bank account.
Each company has its own rules about how much it takes to start a fixed investment plan, and the required monthly investment.
Here's a list of the fund companies I found that accept small investors, and their rules.
Amana funds
Minimum initial investment: $250
Minimum monthly investment: $25
Amana operates two funds, Amana Trust Growth (AMAGX) and Amana Trust Income (AMANX), that invest according to Islamic principles. The funds avoid investing in businesses such as liquor, pornography, gambling and banks. Since collecting interest is prohibited, Amana funds avoid bonds and other fixed-income securities.
Hodges Fund
Minimum initial investment: $250
Minimum monthly investment: $50
Hodges operates a single fund, called simply Hodges Fund (HDPMX).
Steward funds
(formerly Capstone Funds)
Minimum initial investment: $25
Minimum monthly investment: $25
Steward operates four stock and two bond funds following biblical principals and consistent with a Christian lifestyle. The funds avoid investing in companies materially involved in pornography, abortion, alcohol, gambling or tobacco.
TIAA-CREF
Minimum initial investment: $100
Minimum monthly investment: $100
Originally serving only teachers and other public employees, TIAA-CREF operates five stock mutual funds that are open to all investors. Finding them on TIAA-CREF's site is more than a little tricky. From TIAA-CREF's home page, select Fund Research, and then Mutual Funds. Then scroll past Retail Mutual Funds to Retail Class -- Institutional Mutual Funds.
Picking the best funds
Not all funds are created equal, and just because a fund will take your money doesn't make it a good investment. Below are a few measures that will help you pick the best funds. You can do most of your research right here on MSN Money.
Morningstar star rating
Morningstar rates funds by comparing each fund's historical returns (gains) to its historical volatility. The ratings range from one to five stars, where five is best.
Returns reflect how much money you would have made holding the fund for a specific period. Volatility is a measure of how much the fund's share price bounced around along the way. Morningstar's star rating compares each fund's historical returns to it historical volatility. The funds with the highest return to volatility ratios get the highest ratings.
While history is no guarantee, I've found that fund managers with a strong record of outperforming the market tend to continue their winning ways. Start with five-star rated funds. If you find your list is too narrow, consider adding four-star funds, too.
Morningstar risk rating
Risk is the enemy of all investors, small or large. So, I'm going to advise you to check risk two ways, starting with Morningstar's risk rating.
As I mentioned above, Morningstar's overall star rating compares return to volatility. A shortfall of that gauge is that volatile funds can still get high scores if their returns are high enough. By checking Morningstar's risk rating separately, you can rule out funds in that category.
Morningstar separates funds into five risk categories: low, below average, average, above average and high. Avoid "above average" and "high" risk funds.
Standard deviation
Morningstar's risk rating compares a fund's volatility to other funds in its same category (e.g. small-value, banks, tech stocks, etc.). So if a fund is in a volatile category, say technology, Morningstar might rate it as low-risk even though it's risky on an absolute basis.
Standard deviation is similar to Morningstar's risk rating, except it measures historical volatility on absolute basis. By adding standard deviation to the mix, you can rule out Morningstar low-risk-rated funds when they are, in fact, risky.
Standard deviation values run from as low as one to as high as 30 and sometimes higher. The higher the number, the riskier the fund. In my experience, it's best to rule out funds with values above 20.
Most of the fund companies catering to small investors operate only a few funds, so you can check the Morningstar ratings and standard deviation on MSN Money's Fund Portfolio report as I've done here for Vanguard 500 Index (VFINX). As you build your nest egg, diversify your money across different funds to decrease the chance of losing money if one fund happens to go sour.
Editor's note: When originally published, this story incorrectly said minimum investments at Fidelity Investments were as low as $50.
At the time of publication, Harry Domash did not own or control any of the funds mentioned in this article.
How to Invest With $500 or Less - Kiplinger.com
By Erin Burt
March 10, 2005
When I was 14, a friend of mine announced that he had bought a few shares of stock. Our history class had just finished playing a stock market game where most of us, admittedly, performed pitifully. But Dave had caught the bug. He took some of his lawn-mowing money to invest in his favorite place to shop: the Gap (GPS).
If you keep putting off investing because you don't think you have enough money, think again. If a teenager with some loose change and a wad of bills in his pocket can scrape together enough to invest, so can you. You may have to start small, but you can benefit big. One share of Gap stock bought in the spring of 1993 for a mere $3.13 is now worth nearly $22. That's an increase of about 600% without having to lift a finger. Dave's experience proves that you don't need to be rich to invest. But you have to invest to be rich.
No more excuses
With as little as $50, you can buy into a top-notch mutual fund. And you can buy shares of stock for even less than that.
If a 25-year-old invested only $50 a month ($600 a year) and earned an average 10% on her investment, she'd have $316,000 saved by the time she retired. She could have a sweet million if she increased that to just $158 a month (or $1,900 a year). Use this calculator to see how far your investments can take you over time.
Whether you have $50, $100 or $500, make sure you pass this three-part financial test before plunking it down on any investment:
Do you have an emergency cash fund? You should have enough set aside to cover three to six months of expenses. You don't need to have all six before you start investing, but you should shoot for at least two or three. Then allocate a fixed amount every month toward your emergency stash to build it up.
Are you participating in your employer's 401(k) plan? If your employer offers a match on your contributions, make sure you invest as much as you can to take advantage of it. For example, a 50-cent match for every dollar you contribute nets you a 50% return on your investment. You can't beat that.
Have you paid off your high-interest debt? If you have $500 on a credit card charging 18% interest, paying it off is like getting an 18% return on your investment -- it's hard to get that kind of return on the stock market.
Once you've taken care of those three areas, you can look for other ways to invest your extra money. Your goals for how and when you want to use your money will mold your strategy. (Learn more about how to invest to meet different goals.) But because you're young, let's assume you're investing for the long-term.
A good place to start is a Roth IRA. This retirement account allows you to sock away up to $4,000 this year, and you don't pay taxes on your earnings (you contribute your money after you've already paid taxes on it). The drawback: You generally can't touch your earnings until retirement (unless you want to pay a penalty). There are a few exceptions, however, such as buying your first home. You can withdraw your contributions at any time, though, just not your earnings.
You can invest in a variety of assets for your IRA: stocks, bonds, mutual funds, real estate, annuities, CDs, etc. You'll probably want to stick with stocks and mutual funds at first, though, because they have the highest returns over the long haul and they're relatively simple to manage. After you've taken advantage of tax-sheltered investment accounts, you can also set up a regular investment account, where you have to pay taxes on any gains when you sell.
Dip into the mutual fund pool
Mutual funds are a shoestring investor's best friend. If you've ever pooled your money with your friends to buy a few pizzas and drinks, you understand the concept of mutual funds. They combine several investors' money to buy a variety of stocks that may be too expensive for the individual to purchase alone. This allows you to diversify your investments (you can get pepperoni, ham and pineapple, plus sausage and olives) while keeping costs low.
Most fund companies, however, require a minimum investment to get started, typically between $1,000 and $3,000. But the minimums to buy a fund for your IRA are usually lower. You can find several top-notch funds for your retirement account for as little as $250 to $500.
A handful of fund companies, including T. Rowe Price, TIAA-CREF and Scudder will even let you in for a measly $50 if you contribute that amount each month automatically from your bank account. Investing at regular intervals -- a trick called dollar-cost-averaging -- is a good idea no matter what amount you can afford, because over time it helps smooth out the volatility of the market on your portfolio.
You can use Kiplinger's Fund Finder to sort through mutual funds with low minimum investments that meet your individual criteria. Stick to no-load funds with low expense ratios (the average expense ratio for stock funds is about 1.5%). Here are a few suggestions to get you started:
Selected American Shares (SLASX) invests in large undervalued companies and consistently outperforms the S&P 500 index. Requires $250 to open up an IRA. Returned 9.3% over the past year, an annualized 7.9% over the past three years, and 14.5% over the past ten.
Homestead Value (HOVLX) invests in beaten-up shares of large and medium-sized companies. Requires $200 for IRAs. Returned 13.5% over the past year, an annualized 8% over the past three years, and 11.4% over the past 10.
T. Rowe Price Spectrum Growth (PRSGX) invests in ten other T. Rowe Price stock funds, giving you a good mix of stocks in small companies and foreign firms, as well as large companies. Requires $1,000 for IRAs, or regular investments of $50 a month. Returned 10.7% over the past year, an annualized 7.1% over the past three years and 10.9% over the past ten.
T. Rowe Price Equity Index 500 (PREIX) invests in stocks to mirror performance of the S&P 500 index. Requires $1,000 for IRAs, or regular investments of $50 a month. Returned 6.7% over the past year, an annualized 4.4% over the past three years and 11% over the past ten.
You can buy funds directly from the fund company or through a broker.
With a mutual fund, you're basically hiring a professional to manage your money and pick stocks for you that fit into the fund's particular style. With just one fund, you can own dozens of stocks so you're not betting the farm on the performance of one company (think Enron). Plus, everyone that owns the fund, no matter how much or how little they have invested, gets the same manager, investments and return.
If you still can't meet a fund's minimum or you'd rather not commit to a $50 or $100 a purchase each month, you can still get started by investing in a diversified basket of stocks called an exchange-traded fund. ETFs mirror the performance of a market index. So-called "Spider" shares (SPY), for example, mimic the S&P 500, and iShares Russell 2000 (IWM) imitates the index that tracks stocks of smaller companies. (View a list of available ETFs.) ETFs, however, are traded like stocks, so you'll need a broker. We'll talk about how to find one and invest in stocks next.
Stock up on stocks
If you're one of those people who would like to research individual investments yourself and you want to be in control of when you buy and sell certain holdings, you might consider investing directly in stocks.
First, you'll want to learn how to build a solid stock portfolio, and what to look for when evaluating individual socks.
Then, you'll probably need to get a broker. Unfortunately, most brokers also require a minimum investment to open an account, which can run anywhere from $1,000 to $25,000. Discount broker Muriel Siebert, however, doesn't require a minimum investment to get started. E*Trade waives its minimum investment requirement if you're opening an IRA, and Scottrade requires only $500 to open an account. Find the best discount broker for your needs and compare their fees and features.
With a broker, you pay a commission each time you buy or sell, which typically costs between $10 and $40. This can make dollar cost averaging a tad expensive if you want to invest a regular amount, say, every month. So you may have to scale back the frequency to four times a year or less. Plus, you typically can't buy fractional shares of a company through a broker. If you wanted to buy a single share of Berkshire Hathaway (BRK), for example, you'd need to scrape together $90,700.
A great way to invest with little cash -- and get around the fractional-shares problem -- is through ShareBuilder. The commission is a low $4 per trade, and there's no investment or account minimum, or inactivity fee. Basically, ShareBuilder pools together several investors' small trades to make one large trade to save money.
Bypass the broker
Small investors can get around brokers entirely by buying stock directly from a company. About 1,400 companies offer such programs. Minimums, fees and requirements vary. Coca-Cola (KO), for example, only requires a minimum of one share and doesn't charge an enrollment fee. Disney (DIS) requires $1,000 to get started and charges a $10 setup fee, but you can get in for as little as $100 if you contribute that much automatically each month. Get a full list of companies with the details of their plans at Netstockdirect.com.
Another direct-investing option is the Low Cost Investment Plan of the National Association of Investors Corp. NAIC members can purchase shares in a select number of companies. Membership costs $50 a year and includes other NAIC publications and services.
March 10, 2005
When I was 14, a friend of mine announced that he had bought a few shares of stock. Our history class had just finished playing a stock market game where most of us, admittedly, performed pitifully. But Dave had caught the bug. He took some of his lawn-mowing money to invest in his favorite place to shop: the Gap (GPS).
If you keep putting off investing because you don't think you have enough money, think again. If a teenager with some loose change and a wad of bills in his pocket can scrape together enough to invest, so can you. You may have to start small, but you can benefit big. One share of Gap stock bought in the spring of 1993 for a mere $3.13 is now worth nearly $22. That's an increase of about 600% without having to lift a finger. Dave's experience proves that you don't need to be rich to invest. But you have to invest to be rich.
No more excuses
With as little as $50, you can buy into a top-notch mutual fund. And you can buy shares of stock for even less than that.
If a 25-year-old invested only $50 a month ($600 a year) and earned an average 10% on her investment, she'd have $316,000 saved by the time she retired. She could have a sweet million if she increased that to just $158 a month (or $1,900 a year). Use this calculator to see how far your investments can take you over time.
Whether you have $50, $100 or $500, make sure you pass this three-part financial test before plunking it down on any investment:
Do you have an emergency cash fund? You should have enough set aside to cover three to six months of expenses. You don't need to have all six before you start investing, but you should shoot for at least two or three. Then allocate a fixed amount every month toward your emergency stash to build it up.
Are you participating in your employer's 401(k) plan? If your employer offers a match on your contributions, make sure you invest as much as you can to take advantage of it. For example, a 50-cent match for every dollar you contribute nets you a 50% return on your investment. You can't beat that.
Have you paid off your high-interest debt? If you have $500 on a credit card charging 18% interest, paying it off is like getting an 18% return on your investment -- it's hard to get that kind of return on the stock market.
Once you've taken care of those three areas, you can look for other ways to invest your extra money. Your goals for how and when you want to use your money will mold your strategy. (Learn more about how to invest to meet different goals.) But because you're young, let's assume you're investing for the long-term.
A good place to start is a Roth IRA. This retirement account allows you to sock away up to $4,000 this year, and you don't pay taxes on your earnings (you contribute your money after you've already paid taxes on it). The drawback: You generally can't touch your earnings until retirement (unless you want to pay a penalty). There are a few exceptions, however, such as buying your first home. You can withdraw your contributions at any time, though, just not your earnings.
You can invest in a variety of assets for your IRA: stocks, bonds, mutual funds, real estate, annuities, CDs, etc. You'll probably want to stick with stocks and mutual funds at first, though, because they have the highest returns over the long haul and they're relatively simple to manage. After you've taken advantage of tax-sheltered investment accounts, you can also set up a regular investment account, where you have to pay taxes on any gains when you sell.
Dip into the mutual fund pool
Mutual funds are a shoestring investor's best friend. If you've ever pooled your money with your friends to buy a few pizzas and drinks, you understand the concept of mutual funds. They combine several investors' money to buy a variety of stocks that may be too expensive for the individual to purchase alone. This allows you to diversify your investments (you can get pepperoni, ham and pineapple, plus sausage and olives) while keeping costs low.
Most fund companies, however, require a minimum investment to get started, typically between $1,000 and $3,000. But the minimums to buy a fund for your IRA are usually lower. You can find several top-notch funds for your retirement account for as little as $250 to $500.
A handful of fund companies, including T. Rowe Price, TIAA-CREF and Scudder will even let you in for a measly $50 if you contribute that amount each month automatically from your bank account. Investing at regular intervals -- a trick called dollar-cost-averaging -- is a good idea no matter what amount you can afford, because over time it helps smooth out the volatility of the market on your portfolio.
You can use Kiplinger's Fund Finder to sort through mutual funds with low minimum investments that meet your individual criteria. Stick to no-load funds with low expense ratios (the average expense ratio for stock funds is about 1.5%). Here are a few suggestions to get you started:
Selected American Shares (SLASX) invests in large undervalued companies and consistently outperforms the S&P 500 index. Requires $250 to open up an IRA. Returned 9.3% over the past year, an annualized 7.9% over the past three years, and 14.5% over the past ten.
Homestead Value (HOVLX) invests in beaten-up shares of large and medium-sized companies. Requires $200 for IRAs. Returned 13.5% over the past year, an annualized 8% over the past three years, and 11.4% over the past 10.
T. Rowe Price Spectrum Growth (PRSGX) invests in ten other T. Rowe Price stock funds, giving you a good mix of stocks in small companies and foreign firms, as well as large companies. Requires $1,000 for IRAs, or regular investments of $50 a month. Returned 10.7% over the past year, an annualized 7.1% over the past three years and 10.9% over the past ten.
T. Rowe Price Equity Index 500 (PREIX) invests in stocks to mirror performance of the S&P 500 index. Requires $1,000 for IRAs, or regular investments of $50 a month. Returned 6.7% over the past year, an annualized 4.4% over the past three years and 11% over the past ten.
You can buy funds directly from the fund company or through a broker.
With a mutual fund, you're basically hiring a professional to manage your money and pick stocks for you that fit into the fund's particular style. With just one fund, you can own dozens of stocks so you're not betting the farm on the performance of one company (think Enron). Plus, everyone that owns the fund, no matter how much or how little they have invested, gets the same manager, investments and return.
If you still can't meet a fund's minimum or you'd rather not commit to a $50 or $100 a purchase each month, you can still get started by investing in a diversified basket of stocks called an exchange-traded fund. ETFs mirror the performance of a market index. So-called "Spider" shares (SPY), for example, mimic the S&P 500, and iShares Russell 2000 (IWM) imitates the index that tracks stocks of smaller companies. (View a list of available ETFs.) ETFs, however, are traded like stocks, so you'll need a broker. We'll talk about how to find one and invest in stocks next.
Stock up on stocks
If you're one of those people who would like to research individual investments yourself and you want to be in control of when you buy and sell certain holdings, you might consider investing directly in stocks.
First, you'll want to learn how to build a solid stock portfolio, and what to look for when evaluating individual socks.
Then, you'll probably need to get a broker. Unfortunately, most brokers also require a minimum investment to open an account, which can run anywhere from $1,000 to $25,000. Discount broker Muriel Siebert, however, doesn't require a minimum investment to get started. E*Trade waives its minimum investment requirement if you're opening an IRA, and Scottrade requires only $500 to open an account. Find the best discount broker for your needs and compare their fees and features.
With a broker, you pay a commission each time you buy or sell, which typically costs between $10 and $40. This can make dollar cost averaging a tad expensive if you want to invest a regular amount, say, every month. So you may have to scale back the frequency to four times a year or less. Plus, you typically can't buy fractional shares of a company through a broker. If you wanted to buy a single share of Berkshire Hathaway (BRK), for example, you'd need to scrape together $90,700.
A great way to invest with little cash -- and get around the fractional-shares problem -- is through ShareBuilder. The commission is a low $4 per trade, and there's no investment or account minimum, or inactivity fee. Basically, ShareBuilder pools together several investors' small trades to make one large trade to save money.
Bypass the broker
Small investors can get around brokers entirely by buying stock directly from a company. About 1,400 companies offer such programs. Minimums, fees and requirements vary. Coca-Cola (KO), for example, only requires a minimum of one share and doesn't charge an enrollment fee. Disney (DIS) requires $1,000 to get started and charges a $10 setup fee, but you can get in for as little as $100 if you contribute that much automatically each month. Get a full list of companies with the details of their plans at Netstockdirect.com.
Another direct-investing option is the Low Cost Investment Plan of the National Association of Investors Corp. NAIC members can purchase shares in a select number of companies. Membership costs $50 a year and includes other NAIC publications and services.
How to Invest $20, $100, and $1,000 (and More)
By Motley Fool Staff
December 21, 2007
Got only $20 to put away right now?
It may not sound like much, but you can use it to buy shares in Intel. Or Johnson & Johnson. Or Harley-Davidson (you rebel). And those are just a few of more than 1,000 options available. What if you've got $100 -- or $1,000? Your options are even greater.
We're not here to tell you where to invest your money. We won't lay out a handful of stocks on a "buy" list. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash. We can even help you choose a broker.
How to invest $20
Let's start with $20. We're going to assume that you've already paid off any high-interest debt and that you have some money stashed in a safe place (like a savings or money market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough, and you want to begin investing for your future.
Is it even worth it to invest such a pittance?
Heck yeah it is! One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans (DRPs), also known as Drips. They and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.
More than 1,000 major corporations offer these types of stock plans, many of them free, or with fees low enough to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.
Drips may be one of the surest, steadiest ways to build wealth over your lifetime (just make sure you keep good records for tax purposes). For more details on Drips, see "What if I can only invest small amounts of money every month?"
How to invest a couple of hundred bucks
So you've weeded out all the wooden nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund (the only kind of mutual fund Fools like). An index fund that tracks the S&P 500 is your ticket to an investment that has traditionally returned about 10% per year.
Some index funds require as little as $250 for you to call yourself an owner. This low minimum is usually restricted to IRAs (Individual Retirement Accounts). After your initial investment, you can add as much money as you like, as frequently as you like, with no additional costs or commissions. You purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.
If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.
How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and now you'll have your pick of fund companies that require higher initial investments. This freedom will enable you to shop around for a fund with the lowest expense ratio.
You should also seriously consider opening a discount brokerage account. You'll want to focus on the account option that best serves your needs; some accounts require a minimum initial deposit, and some don't. That means you can open up an account with whatever investing money you have available, and start researching and perhaps purchasing individual companies. (Or, if you're enamored of index investing, you can easily invest in Spiders, a stock-like investment that mimics the performance of the S&P 500.)
The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, a Drip or an index fund may still be the way to go.
How to invest $1,000-plus
What can you do with a grand? Obviously, with $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment.
Say you've got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111.07. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it. (As always, your mileage may vary.)
Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. With small accounts, that can be a challenge, but with such low commissions being offered by discount brokers, it's definitely doable.
December 21, 2007
Got only $20 to put away right now?
It may not sound like much, but you can use it to buy shares in Intel. Or Johnson & Johnson. Or Harley-Davidson (you rebel). And those are just a few of more than 1,000 options available. What if you've got $100 -- or $1,000? Your options are even greater.
We're not here to tell you where to invest your money. We won't lay out a handful of stocks on a "buy" list. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash. We can even help you choose a broker.
How to invest $20
Let's start with $20. We're going to assume that you've already paid off any high-interest debt and that you have some money stashed in a safe place (like a savings or money market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough, and you want to begin investing for your future.
Is it even worth it to invest such a pittance?
Heck yeah it is! One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans (DRPs), also known as Drips. They and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.
More than 1,000 major corporations offer these types of stock plans, many of them free, or with fees low enough to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.
Drips may be one of the surest, steadiest ways to build wealth over your lifetime (just make sure you keep good records for tax purposes). For more details on Drips, see "What if I can only invest small amounts of money every month?"
How to invest a couple of hundred bucks
So you've weeded out all the wooden nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund (the only kind of mutual fund Fools like). An index fund that tracks the S&P 500 is your ticket to an investment that has traditionally returned about 10% per year.
Some index funds require as little as $250 for you to call yourself an owner. This low minimum is usually restricted to IRAs (Individual Retirement Accounts). After your initial investment, you can add as much money as you like, as frequently as you like, with no additional costs or commissions. You purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.
If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.
How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and now you'll have your pick of fund companies that require higher initial investments. This freedom will enable you to shop around for a fund with the lowest expense ratio.
You should also seriously consider opening a discount brokerage account. You'll want to focus on the account option that best serves your needs; some accounts require a minimum initial deposit, and some don't. That means you can open up an account with whatever investing money you have available, and start researching and perhaps purchasing individual companies. (Or, if you're enamored of index investing, you can easily invest in Spiders, a stock-like investment that mimics the performance of the S&P 500.)
The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, a Drip or an index fund may still be the way to go.
How to invest $1,000-plus
What can you do with a grand? Obviously, with $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment.
Say you've got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111.07. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it. (As always, your mileage may vary.)
Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. With small accounts, that can be a challenge, but with such low commissions being offered by discount brokers, it's definitely doable.
Investment from Wikipedia
Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. The basic meaning of the term being an asset held to have some recurring or capital gains. It is a asset that is expected to give returns without any work on the asset perse.
TYPES OF INVESTMENT
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business Management
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). The manager must assess whether the net present value of the investment to the enterprise is positive; the net present value is calculated using the enterprise's marginal cost of capital.
A business might invest with the goal of making profit. These are marketable securities or passive investment. It might also invest with the goal of controlling or influencing the operation of the second company, the investee. These are called intercorporate, long-term and strategic investments. Hence, a company can have none, some or total control over the investee's strategic, operating, investing and financing decisions. One can control a company by owning over 50% ownership, or have the ability to elect a majority of the Board of Directors.
Economics
In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of production after consumption, government spending, and exports are subtracted.
I is divided into non-residential investment (such as factories) and residential investment (new houses). Net investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation measurable at a point in time (say December 31st).
Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.
Finance
In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.
Real estate
In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.
Residential Real Estate
The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the lender stands to gain returns from it. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.
Commercial Real Estate
Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50-70%.
TYPES OF INVESTMENT
The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.
Business Management
The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the assets that the business enterprise obtains. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). The manager must assess whether the net present value of the investment to the enterprise is positive; the net present value is calculated using the enterprise's marginal cost of capital.
A business might invest with the goal of making profit. These are marketable securities or passive investment. It might also invest with the goal of controlling or influencing the operation of the second company, the investee. These are called intercorporate, long-term and strategic investments. Hence, a company can have none, some or total control over the investee's strategic, operating, investing and financing decisions. One can control a company by owning over 50% ownership, or have the ability to elect a majority of the Board of Directors.
Economics
In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of production after consumption, government spending, and exports are subtracted.
I is divided into non-residential investment (such as factories) and residential investment (new houses). Net investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation measurable at a point in time (say December 31st).
Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.
Finance
In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.
Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.
In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.
Real estate
In real estate, investment is money used to purchase property for the sole purpose of holding or leasing for income and where there is an element of capital risk. Unlike other economic or financial investment, real estate is purchased. The seller is also called a Vendor and normally the purchaser is called a Buyer.
Residential Real Estate
The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the lender stands to gain returns from it. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.
Commercial Real Estate
Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50-70%.
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