Monday, May 21, 2007

Investing Your Dollars

The Basics Continued ...

What to do With your Money:

There are many investment instruments to consider when choosing what to do with your money. One thing to consider when making an investment decision is the Risk-Return trade-off, certain investments are "safer" but these investments bring with them a lower return, where as "riskier" investments provide a higher return. Investments fall into three major categories that serve everyones needs:

  • Cash and Cash Equivalents: Assets, which at any time can be made available (liquid). Some examples are savings accounts, treasury bills and money market mutual funds. This is the safest category but it also provides the lowest return.

  • Fixed Income Investments: These usually provide a higher return than the previous category.They provide a source of regular investment income that stays the same over a given period. Examples are term deposits, GICS, bonds, and income mutual funds.

  • Equity Investments: These assets grow in market value but don't necessarily pay out dividends. Examples are stocks and equity mutual funds. This is the riskiest category, particularly for short-term investments but it also has the potential for the highest rewards.

The type or mix of investments you choose depends largely on your investor profile, your time-frame for investing and your feeling about risk. It is for you to decide how much risk you are comfortable with and what return you are looking for.

Investment Options:

As an investor you can be a "lender" or "Owner":

  • Lender: As a lender, you are effectively lending your money to an institution, such as a bank, government, or corporation in exchange for interest income paid at a specified rate and at a specified time. Lender investments are things like bonds, GICs and Treasury Bills. It is important to not also that in addition to interest income you are guaranteed the return of your original investment and that the investment can be sold before maturity.
  • Owner: As an owner, you become a partial owner in the company you have invested in. As you own a portion of the company you receive income in the form of dividends ( a portion of the company's earnings). Money is made from two sources, dividends and capital appreciation (when you sell your investment you get more than what you paid for it). These investments are mostly stocks.