An investment is made whereby money is allocated in the expectation of some additional benefit, or wealth creation in the future. In finance, this benefit is referred to as a return. The return which can be positive or negative, meaning a gain or a loss, is realized from the sale of an investment, the unrealized capital appreciation (or depreciation), or investment income such as a dividend payment or interest, or a combination of these. In international or foreign transactions, the return may include a currency gain or loss due to changes in the currency exchange rate between the base and foreign currency.
The greater the degree of risk associated with an investment, the higher the expected level of return. When a low risk investment is made, such as the purchase of government bonds, the expected return is also generally low. New investors are often advised to initially adopt a low risk investment strategy and diversify their portfolio. This diversification will reduce the fluctuation in value of the portfolio removing a major concern for neophyte investors. To help investors in this regard we have curated a investment book list explaning many of themes in greater detail. We also reccommend various websites such as Seeking Alpha for additional insight.
Investment Strategies
Common investment strategies include the purchase of stocks in public companies whose shares are traded on a stock exchange. The investor buys stocks in companies whose value is expected to increase over time. This is known as a traditional “long only” investment strategy. At the other end of the spectrum of stock investing is speculation. This involves the purchase of assets with a variable length holding period. Speculators attempt to capitalize on market inefficiencies for explosive short-term profit. This is considered a high risk strategy.
In addition to this, there are many more types of specialist stock trading strategies. One of which is merger arbitrage. This involves buying stock in companies that are in the process of a takeover or merger. The investor attempts to capture the spread or discount to the offer price. In essence, the investor is being paid for assuming the risk of the deal not being consummated as expected.
More about Risk
The term “investment” can refer to any mechanism used for generating future income. In an economic sense, investing is putting money to work to start or expand a project. The production of goods required to produce other goods can also be considered investing. In a financial sense, investment includes the purchase of bonds, stocks, real estate property or any other so called alternative investment amongst many others.
As mentioned previously, the safety (or risk) of the principal is of great concern in any investment especially those that are new to the subject. Some investors however are more risk tolerant than others. This is a personal decision based on many factors. Some investors may be willing to lose a portion of the principal in return for the opportunity of achieving higher gains. This element of investing is referred to as an investors risk tolerance.
