Where to invest money. Proper investment of money

Investing is something in which an investor puts money in order to make his money grow. If an investor works part-time, then the hard-earned money can be invested by him, which will make his money work for him. Investments carry different degrees of risk, which may depend on the amount of investments, their duration and, most importantly, the rate of return.

Safer investments provide greater confidence that the investor can retain what he originally invested, although the rate of return in such cases may be lower. With an increase in the risk of investments, the investor may offer a higher rate of return, but the risk that it may lead to the loss of invested money increases or partially increases.

Based on his own budget and goals, before investing, a person must decide what type of investor he wants to become and what financial risk he is willing to accept with his money. Investments are either cash or cash equivalents, investments in fixed capital, equity investments, investments in the purchase of liquid goods in commodity markets, etc.

Cash or cash equivalents are the safest investments, but usually have the lowest rates of return. They include savings accounts, time deposits, treasury bills and money market mutual funds. These investments can easily be converted into cash.

Most banks, trust companies, credit unions, and investment firms offer a wide range of investment opportunities for investing clients’ money. It all depends on what type of investment the client prefers according to the degree of risk, duration, volume and other market factors.

These financial institutions have on hand consultants who are willing to help invest either in banking products or in other financial instruments, which implies a fee for consulting services or paying management fees. Therefore, the investor needs to think about goals, preferences and comfort zone before investing your money.

Term deposit (term deposit)

A term deposit is the placement of cash in Russian rubles or foreign currency on a bank account for a fixed term, which can range from one month to several years. Bank deposit is stored in the bank for a fixed period and returned to the depositor with interest. At present, interest on deposits in Russian banks usually ranges from 5% to 12% per annum and varies depending on the term of the deposit, the amount of the deposit, the currency of the deposit and various additional conditions.

In the classical form, a term deposit is a deposit of money in an account in a bank for a certain period without the possibility of early withdrawal without penalty and interest payments at the end of the deposit term.

However, additional terms of the time deposit may be the possibility of replenishing the deposit or partial withdrawal of funds from the deposit with a mandatory minimum balance, monthly or quarterly payment of interest on the deposit with the possibility of their capitalization or without such possibility, payment of a certain percentage with early withdrawal. Such types of deposits with additional conditions are now in abundance offered by commercial banks, but interest rates on them are usually slightly lower than in the case of the classic fixed-term deposit.

The advantage of the term deposit in comparison with other types of investments is the almost 100% guarantee of the return of funds with interest known in advance. Since all deposits are insured by the Deposit Insurance Agency, even in the event of a bank bankruptcy, payments on deposits are made in full (currently, up to 700 thousand rubles). Thus, to minimize the risk of partial loss of the deposit, it is recommended to place funds within the above mentioned amount in different banks or on different individuals.

Despite the guarantee of return on investment, time deposits still have some risks. First of all, it is currency risk. No deposit is insured against a sharp change in the exchange rate of the deposit. In addition, there is inflationary risk, when the rate of inflation in the country may exceed the interest rates on the term deposit and the real amount of money with interest returned by the bank will be less than the initial contribution (adjusted for inflation).

However, banks try to take these risks into account and, during periods of high inflation or currency volatility, they usually offer higher interest rates on term deposits.

When choosing a bank, it is necessary to take into account at least the position of the bank in the overall rating of banks, as well as the participation of the bank in the deposit insurance system and the proposed percentage. As a rule, small banks, which need more cash, offer a larger percentage than large state-owned banks. Here it is important to choose a middle ground, so that the percentage is decent and the bank’s rating is high enough. If the bank offers a very high deposit rate – for example, 12% or more, it is necessary to study the proposed contract for the presence of “pitfalls” more carefully.

Government bonds

Government bonds are bonds issued by a national government, usually with a promise to pay periodic interest payments and repay the face value at the date of maturity. Government bonds, as a rule, are denominated in the country’s own currency. Bonds issued by national governments in foreign currency are generally referred to as sovereign bonds, although the term sovereign bond may also refer to bonds issued in a country’s own currency.

The conditions under which a state can sell bonds depend on how creditworthy the market is in the given state. International rating agencies publish bond ratings, but market participants usually have their own opinion on this.

The first ever government bonds were issued by the Bank of England in 1693 to raise money to finance the war against France. Later, governments in Europe began issuing perpetual bonds (bonds with no maturity date) to finance wars and other government spending. The use of perpetual bonds was discontinued in the 20th century, and governments currently issue bonds with a limited maturity date.

Risks. Government bonds in a country’s own currency are sometimes perceived as theoretically close to risk-free bonds, since it is assumed that the government can raise taxes or print additional money to be able to repay its own securities. However, there have been cases where the government defaulted on its domestic debt market, such as Russia in 1998 (“ruble crisis”).

As an example, in the US, treasury securities are denominated in US dollars. In this case, the term “risk free” means free credit risk. However, other risks still exist, such as foreign exchange risk for foreign investors (for example, non-American investors in US securities received lower returns in 2004 because the US dollar depreciated against most other currencies).

Secondly, there is a risk of inflation, in that at maturity, the purchasing power of the amount originally invested in bonds, taking into account interest, will be less than expected, if inflation is higher than expected. Many governments issue inflation-indexed bonds, which protects investors from the risk of inflation by tying interest payments and redemption payments to the consumer price index.

If the central bank buys government securities, such as bonds or treasury checks, this increases the money supply, in effect, creating money.

It is possible to purchase government bonds of the Russian Federation denominated in rubles in brokerage houses, however, these securities currently have a relatively low yield – 6-9% and are not of interest to a large number of investors. At the same time, some investors based on them form the so-called “risk-free” component of the investment portfolio. Due to the low yield on the Russian government bond market, at present only pension funds and state banks remain.

The advantage of government bonds is their high liquidity, since at any time they can be exchanged for money almost freely.

Corporate Bonds

Corporate bonds are bonds issued by companies (corporations). These are securities that corporations issue in order to quickly and efficiently raise money to expand their business. The term “corporate bonds” usually applies to long-term debt instruments, usually with a maturity of at least one year, after the date of their issuance. The term “commercial paper” is sometimes used for instruments with a shorter circulation period.

Sometimes the term “corporate bonds” is used to include all bonds, except those issued by governments in their own currencies. However, under strict consideration, it applies only to those bonds issued by corporations. Bonds of local governments and supranational organizations are not corporate bonds.

Corporate bonds are often registered on the main stock exchanges (the bonds are then called “listed” (listed) bonds) and electronic communications networks (ECN), and coupon (ie interest payments) are usually taxed. Sometimes this coupon can be zero with a high redemption value. However, despite the fact that many bonds are listed on stock exchanges, the vast majority of corporate bond trading in the most developed countries is decentralized and occurs on a dealer basis or over-the-counter market.

Some corporate bonds have a built-in option that allows the issuer to repurchase the debt before the maturity date. Other bonds, known as convertible bonds, allow investors to convert bonds into stocks. Compared to government bonds, corporate bonds tend to have a higher default risk. This risk depends on the particular corporation that issued the bond, the current market conditions, the government with which the bond issuer compares and the company’s rating. Corporate risk holders are compensated for this risk by a higher yield than government bonds. The difference in profitability reflects the probability of default, the expected loss in the event of a default, and may also reflect liquidity and risk premiums.

Risks when investing in corporate bonds:

  • The risk of default, which was described above.
  • The risk of credit spread. The risk that the credit spread of the bonds (the additional return to compensate investors for accepting the risk of default), which takes place in the case of a fixed coupon, becomes insufficient to compensate for the risk of default due to the deterioration of the company’s position. Since the coupon is fixed, the only way to adjust the credit spread to new circumstances is to drop the market price of the bond and increase the yield to a level where the credit spread will be in line with market expectations.
  • Interest rate risk. The level of yield in the bond market as a whole, as well as the yield of government bonds, may change, and thus cause changes in the market value of a fixed coupon bond, therefore the yield to maturity adapts to the new corresponding levels.
  • Liquidity risk. There may not be a long-term secondary bond market, with the result that the investor hardly sells at, or even close to, a fair price. This risk may become more serious in emerging markets where large quantities of junk bonds are issued, such as China, Vietnam, Indonesia, etc.
  • Risk of delivery. A large issue of new bonds, similar to the one that was originally held, could lead to a fall in price.
  • Inflationary risk. Inflation reduces the real value of future major cash flows. Waiting for inflation, or higher inflation, can lead to an immediate price reduction.
  • Tax risk. Unforeseen changes in taxation may adversely affect the value of a single bond for investors and, therefore, the immediate market value.

Corporate bonds have a higher yield compared to government bonds, and therefore constitute a significant part of the investment portfolios of many investors. You can buy corporate bonds in special brokerage houses.

The yield of corporate bonds can vary in a fairly wide range and range from 6-7% to 25-20%. At the same time, bonds with high yields are usually risky, and therefore, when buying bonds, it is necessary to carefully analyze the status of the issuer, news about it, as well as all other useful information.

Investment in stocks

Shares and equity funds are the investments with the greatest potential for high long-term returns. They are associated with risk, offering the most bang for your buck, but with a trend that can go either way. In this case, the investor must decide whether he can accept the loss of part of the initial investment if the stock falls.

In addition to the returns provided by the growth in the value of shares, some equity investments involve the payment of dividends. A company in which an investor invested money may pay dividends to shareholders from profits, in accordance with the number of shares that investors own.

Shares are evaluated according to different principles in different markets, but the main one is the market principle, i.e. the establishment of such a share price at which the transaction of purchase and sale of shares will be the most likely. The liquidity of the markets is the main criterion, in other words, whether a stock can be sold at any time. The actual sale of shares between the seller and the buyer, as a rule, is considered the best indicator of the “true value” of the shares at a particular point in time.

From a practical point of view, shares are separate parts representing equal shares in the capital of a commercial organization. The owner of the appropriate number of shares is entitled to receive a certain part of the profits earned by this company. Shares also provide the respective owners with the opportunity to claim part of the values ​​of a particular company. This applies, however, only when the company is liquidated.

According to the financial terminology, “share” is considered as a unit of account that can represent several monetary instruments, such as stocks, mortgage investment trusts, mutual funds or limited partnerships. In the UK, the term “stock” usually refers to a stock.

Earnings that the stockholder earns on their shares are called dividends. Earnings on shares held by the holder is possible only if the company receives a profit. Dividends are actually part of the profits of a company whose shares can be owned by the relevant shareholder. They are not reinvested profits.

The process of buying and selling stocks involves contacting a brokerage firm, which in this case acts as an intermediary. The return on investment in stocks can be up to 100% per annum or more, but there is also a high risk of losing a portion of the investment when the cost of the acquired shares decreases.

In practice, investing in stocks is better during the bottom of the economic crisis, when stock prices are usually well below the multi-year average. In this case, with the beginning of economic growth there is a big chance to multiply the initial investment by two, three or more times. Or buy currently undervalued market shares with the expectation of future growth. At the same time, practice shows that in periods of stagnation or contraction of the economy, the purchase of shares is likely to result in losses.

To buy shares only for the sake of receiving dividends is also meaningless, since their size is usually incomparable with the value of shares. In addition, the payment of dividends is not the responsibility of the company. Therefore, dividends are just a nice bonus and no more.

Mutual investment funds

A mutual fund is an investment product in which the money of one investor is combined with the money of many other investors. A professional fund manager invests this cumulative amount of money in various securities, depending on the specific goals of the fund.

If an investor, like many such people, does not have enough time to study potential assets and manage their investments, but he still, as some say, would like to be able to invest their money in assets and move them between assets from time to time, if it sounds like his style, then such an investor may consider investing in a mutual fund.

There are funds that invest in specific markets or in geographic sectors, while other funds invest in blue-chip stocks or small companies. There are also “green” funds that invest only in environmentally friendly enterprises.

Mutual funds have many advantages:

  • access to a wider range of investments than an investor might otherwise be able to afford;
  • instant diversification. If one company, in whose shares the fund invests, is in a poor financial condition, this will most likely have little effect on the overall performance of the mutual fund;
  • availability. Most financial institutions offer a wide range of mutual funds;
  • easy way to invest. For example, most financial institutions give a customer the opportunity to buy shares in a mutual fund by simply transferring money from a personal account;
  • advantage of professional management.

As with any type of investment, investing money in mutual funds has an element of risk. Although the fund is diversified, it still reflects the movement of acquired securities. And depending on the type of mutual fund, the risk can vary from very low to very high. Mutual funds, as a rule, imply long-term investments. When investing in mutual funds, the investor can potentially earn money in two ways: by distribution (the profit of the funds that is transferred to the investor) or by increasing the value of a share or fund stock.

The investor should be aware of fees associated with mutual investment funds. In many cases, fees for the purchase or sale of a share are not provided (they are called funds without load). However, some funds may charge either a down payment, called a front load, or a fee when an investor sells a fund unit called a background load. With these fees, the investor pays a percentage of the purchase price, which may or may not be canceled if the investor keeps the funds in the fund long enough. All mutual investment funds charge a fee, known as the Management Expense Ratio (MER), which is the annual cost of managing and operating a fund.

In Russia, mutual funds have different returns and risk levels depending on the type of fund. Thus, bond funds investing money of shareholders solely in bonds have the lowest degree of risk and practically guaranteed, but relatively small income – about 10% per annum, which is comparable to the interest rate on the term deposit. However, investing in such a fund has an advantage due to the fact that there is a possibility of selling a share without penalties at almost any time in contrast, while the contribution must rest for a fixed period until the end.

The equity fund is the most risky because it invests the shareholders’ money only in stocks and is completely dependent on the volatility of the value of the shares in the stock market. In some years, the yield of such funds may be 100% per annum or more. In others – usually in periods of economic recession or stagnation – it is likely to get a negative result, albeit small.

Mixed funds are the golden mean, as they can invest both in stocks and bonds, depending on market conditions, and, with proper management, are able to achieve significant indicators of profitability. Data on the performance of mutual funds are published on special sites that are easy to find on the Internet. You can buy shares in a mutual investment fund in the leading banks of the country, therefore such investments are among the most affordable.

Forex Investments

Forex (Forex) is a market in which currencies are traded. The Forex market is the largest, most liquid market in the world with an average trading volume in excess of $ 1.9 trillion. per day and includes all currencies of the world. The Forex market does not imply a central exchange platform.

The Forex market operates 24 hours a day, five days a week, and currencies are traded around the world in the main financial centers – London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. Forex is the largest market in the world in terms of total trading volume, and any individual, firm or country can participate in trading in this market.

The leading currencies of the market are the US dollar, the euro, the Japanese yen, the British pound and the Swiss franc. It is with these currencies that an overwhelming number of transactions are made, although the undisputed leader of trading is the dollar / euro currency pair. Individuals can access Forex trading through forex brokers, which are abundant on the Internet. All of them offer, at first glance, identical conditions, but some moments are still different. Therefore, when choosing a forex broker, it is necessary to evaluate all the proposed conditions, compare them with other brokers, and also read reviews about forex brokers on the respective sites.

Profitability in the forex market can vary from a few percent to several hundred percent per annum, however, the risks of loss are also very high. In order to successfully trade in the Forex market, it is necessary to study educational material that is actively and freely offered on the Internet, read additional materials, reviews and tips, choose a trading strategy, download and configure an advisory program for automated forex trading.

Initially, after registering with the selected forex broker, you should try yourself in trading on a demo account and apply this knowledge in practice. Some forex brokers, after registering, transfer a small amount to the client’s account to start trading, which, of course, is also worth using for beginners when starting to trade in the Forex market for real money.

However, successful self-trading on Forex requires a lot of time and certain knowledge. Therefore, investors often turn to professional traders for help and place money on PAMM accounts (transfer money to trust management) for a small commission.

PAMM accounts

The interest distribution management module (PAMM) is a technical solution that is provided to customers of large banks and investment organizations, as well as forex brokers, and allows them to transfer their accounts to the trust management of a professional trader appointed by these organizations on the basis of a limited trade power of attorney. PAMM allows the professional trader, in turn, to manage simultaneously an unlimited number of managed accounts on the same trading platform. Managed accounts can be financed in different currencies and belong to different institutions.

Depending on the size of the deposit, each managed account has its own share in PAMM. The total amount of all shares under one PAMM account is always 100%. The results of the activity of a professional trader who manages an account (profit or loss) are distributed among managed accounts in accordance with their shares. Trading on a PAMM account is no different compared to the self-trading of a trader.

The advantage of using PAMM accounts and, consequently, trust management in the Forex market as compared to independent trading is that the investor does not need to comprehend all the features of the foreign exchange market and constantly monitor positions, possess certain skills, knowledge and come up with trading strategies. The security of such accounts for the investor is determined by the fact that the managing trader is unable to withdraw funds from clients, he can only manage them. In addition, usually the trader simultaneously manages his own account and is naturally interested in obtaining the greatest possible profit.

The profitability of investments in PAMM accounts with proper selection of such accounts can be 100% or more. However, high-yield PAMM is usually more risky and there is a risk of losing at least some of the investments. In order to diversify risks, it is advisable to invest in at least several PAMM accounts, and it is better that there are more than 10 of them. When choosing, it is important that the PAMM account shows profitability for a long time – at least 2-3 years. Short-term bursts of profitability occur in almost all accounts and, as a rule, do not indicate good management.

Binary options

When the markets grow steadily and have all the prerequisites for further sustainable growth, that is all clear – it is necessary to invest in growing assets or mutual investment equity funds that can bring very good income, but what to do if there is an economic crisis and stagnation in the yard? Well, for example, you can try yourself in the binary options market.

Binary options have only two options of execution – “all” or “nothing”. The most common types of binary options are “call” (Call or Up) and “put” (Put or Down) options. The first is a bet on raising the price of an asset to a certain level, the second – on a decrease. The exercise price of the option, as well as the amount of profit of the investor in the case of the “correct” result are set in advance. If the acquired call option closes at a price equal to or higher than the strike price, then the investor receives a fixed income, if lower, the investor does not receive anything or the minimum percentage depending on the conditions. In the case of a put option, everything happens exactly the opposite. Other options are “One Touch”, “No Touch”, “Double Touch”, “Double No Touch” and others.

For individuals, binary options brokers usually offer a profit of up to 85% if they achieve the “right” result. They offer three types of binary options:

Up / Down (Up / Down or Call / Put): the price of the underlying asset at the end of the term of an option must be higher or lower than the original price.

Border option (option with the selected zone): the price of the underlying asset must be located at the end of the term in the price range set in the range parameter settings.

One Touch: The price of the underlying asset must reach or exceed the strike price before the option expires.

Binary options may vary depending on whether they are offered to individuals and market professionals. For individuals, an option can last several hours or the next day, while for professionals they can last several years.

The profitability of binary options varies depending on the type of option. So, for “put” and “call” payment options to the amount initially invested in the case of the “correct” result can range from 65% to 85% of the price of the underlying asset. In the case of a “wrong” result, usually returns from 0% to 15% of the originally invested amount. In the case of the One Touch option, the payouts can be up to 300%, but the higher the yield, the lower the probability of winning.

Precious metals

Gold, silver and other precious metals in the form of ingots (actual metal) or certificates of ownership of these metals can also be invested. Prices for precious metals from year to year can vary significantly – even up to several times, and therefore a chance to make money by investing money at the right time.

Practice shows that, for example, by investing in gold in the mid-2000s and selling metal in 2012, it was possible to increase its capital 4-5 times. Silver rose even more dramatically between 2008 and 2011 from less than $ 10 / oz. to more than $ 40 / oz. Approximately three times during the same time, prices for platinum and palladium increased.

However, at the end of 2012, investments in precious metals became irrelevant due to a rather impressive and progressive fall in their prices on the world market. And investors, apparently, will have to wait several years before the start of a new rise in prices for gold and other precious metals. However, if we consider a very long-term perspective for 20-30 years or more, then investments in precious metals are in any case relevant due to inflation. However, all the same, I want to buy cheaper.

In order not to deal with physical metal, i.e. bullion, do not pay VAT and do not look for a place to store it (for an additional fee) invented an impersonal metal account. This service is provided by many banks. A customer buys metal on paper, but in reality, an account is simply opened in his name, in which the customer has the amount of metal purchased. You can close such an account at any time, and the profit on investments is obtained due to the difference between the purchase and sale prices minus the minimum bank commission.

Real estate and other investments

Some people make their money work in other areas. Perhaps the most common is the acquisition of rental property. In this case, the investment income for property owners is to receive rent. In addition, you can get additional income from investments if real estate prices rise. The yield of this type of investment without real estate price growth is relatively small – usually 6-8% per annum, which is even less than the percentage of the term deposit. However, strategically, this type of investment can be justified in certain life situations, for example, either based on the subsequent resale of the property in order to improve its own living conditions, or as an additional means of generating income in the presence of free living space.

Author: Evan

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