Importance of Investing

Importance of investing:

Investing is of paramount importance in contemporary society. It is one way multitudes of people all over the globe have made and sustained an income, but this is not the only reason people invest. Individuals invest for personal gain whilst businesses also invest to create more money and resources for the future.

Methods of investment:

There are four main asset classes that people may choose to invest in: Cash, fixed-interest investments, property and shares.

Cash: A cash deposit simply stores money, there is little or no interest involved in a cash account. This method of investing is very simple but it is not a very effective way to invest as not much profit is made.

Fixed-interest investments (bonds): A fixed-rate investment is an agreement to pay a certain amount of money at a set date in the future. The bonds can be sold before the investment period is over although the price is determined by an interest rate that can change every time the bond is sold.

Property: Property is a popular investment due to the fact that is tangible and that the buyer has complete control of the asset. People may buy houses and rent them out for a price that they decide has to be paid every week or month. Another investment is buying residential or business property.

Shares: Shares represent a part of a company, they give the owner rights to part of the profit of the company. The owner of the shares receives a ‘dividend’ which is the income created by these shares when they are sold for a capital loss or gain.

Risk and Return

Return is the amount of money received from an investment per annum.

Risk is the probability that after investing the actual return will be lower than the actual return.

Idea of risk vs return

Risk vs return is an idea used by everyone whilst investing, the premise is that the riskier the investment the higher the potential return of the investment but also if the investment is more risky there is a chance that you may lose money on your investment.