{"id":6579,"date":"2011-06-14T21:11:30","date_gmt":"2011-06-15T03:11:30","guid":{"rendered":"http:\/\/ishmaels.net\/blog\/?p=6579"},"modified":"2011-06-14T21:11:30","modified_gmt":"2011-06-15T03:11:30","slug":"understanding-the-most-important-investment-concepts","status":"publish","type":"post","link":"https:\/\/www.ishmaels.net\/blog\/2011\/06\/14\/understanding-the-most-important-investment-concepts\/","title":{"rendered":"Understanding The Most Important Investment Concepts"},"content":{"rendered":"<p>It&#8217;s always good to have at least a basic foundation of fundamental investment knowledge whether you&#8217;re a beginner to investing or working with a professional <strong>financial<\/strong> <strong>advisor<\/strong>. The reason is simple: You are likely to be more comfortable in investing your money if you understand the lingo and basic principles of investing. Combining the basics with what you want to get out of your investment strategy, you will be empowered to <strong class='StrictlyAutoTagBold'>make<\/strong> <strong>financial<\/strong> decisions yourself more confidently and also be more engaged and interactive with your <strong>financial<\/strong> <strong>advisor<\/strong>.<\/p>\n<p>Below are a few basic principles that you should be able to understand and apply when you are looking to potentially invest your money or evaluate an investment opportunity. You&#8217;ll find that the most important points pertaining to investing are quite logical and require just good common sense. The first step is to <strong class='StrictlyAutoTagBold'>make<\/strong> the decision to start investing. If you&#8217;ve never invested your money, you&#8217;re probably not comfortable with <strong class='StrictlyAutoTagBold'>make<\/strong> any investment decisions or moves in the <strong>market<\/strong> because you have little or no experience. It&#8217;s always difficult to find somewhere to begin. Even if you find a trusted <strong>financial<\/strong> <strong>advisor<\/strong>, it is still worth your <strong>time<\/strong> to educate yourself, so you can participate in the process of investing your money and so that you may be able to ask good questions. The more you understand the reasons behind the advice you&#8217;re getting, the more comfortable you will be with the direction you&#8217;ve chosen.<\/p>\n<p><strong>Don&#8217;t Be Intimidated by the Financial Lingo <\/strong><\/p>\n<p>If you <strong class='StrictlyAutoTagBold'>turn<\/strong> on the TV to some <strong>financial<\/strong> network, don&#8217;t worry that you can&#8217;t understand the <strong>financial<\/strong> professionals <strong>right<\/strong> away. A lot of what they say can actually boil down to simple <strong>financial<\/strong> concepts. Make sure you ask your <strong>financial<\/strong> <strong>advisor<\/strong> the questions that concern you so you become more comfortable when investing.<\/p>\n<p><strong>IRAs Are Containers to Hold Investments-They Aren&#8217;t Investments Themselves <\/strong><\/p>\n<p>The first area of confusions that most new investors get confused about is around their retirement vehicles and plans that they may have. If an investor has an <strong>individual<\/strong> retirement accounts (IRA), a 401(k) <strong>plan<\/strong> from work, or any other retirement-type <strong>plan<\/strong> at work, you should understand the differences between all the accounts you have and the actual investments you have within those accounts. Your IRA or 401(k) is just a container that houses your investments that brings with it some tax-advantages.<\/p>\n<p><strong>Understand Stocks and Bonds <\/strong><\/p>\n<p>Almost every <strong>portfolio<\/strong> contains these kinds of asset classes. If you buy a <strong>stock<\/strong> in a <strong>company<\/strong>, you are buying a share of the <strong>company<\/strong>&#8216;s earnings. You become a shareholder and an owner at the same <strong>time<\/strong> of the <strong>company<\/strong>. This simply means that you have <strong>equity<\/strong> in the <strong>company<\/strong> and the <strong>company<\/strong>&#8216;s future &#8211; ready to go up and down with the <strong>company<\/strong>&#8216;s ups and downs. If the <strong>company<\/strong> is doing well, then your shares will be doing well and increase in value. If the <strong>company<\/strong> is not doing well or fails, then you can lose value in your investment.<\/p>\n<p>If you buy bonds, you become a creditor of the <strong>company<\/strong>. You are simply lending money to the <strong>company<\/strong>. So you don&#8217;t become a shareholder or owner of the <strong>company<\/strong>\/bond-issuer. If the <strong>company<\/strong> fails, then you will lose the amount of your loan to the <strong>company<\/strong>. However, the <strong>risk<\/strong> of losing your investment to bondholder is less then the <strong>risk<\/strong> to owners\/shareholders. The reasoning behind this is that to stay in business and have access to funds to finance future expansion or growth, the <strong>company<\/strong> must have a good credit rating. Furthermore, the law protects a <strong>company<\/strong>&#8216;s bondholders over its shareholders if the <strong>company<\/strong> goes bankrupt.<\/p>\n<p>Stocks are considered to be <strong>equity<\/strong> investments, because they give the investor an <strong>equity<\/strong> stake in the <strong>company<\/strong>, while bonds are referred to as fixed-income investments or debt instruments. A mutual fund, for instance, can invest in any number or combination of stocks and bonds.<\/p>\n<p><strong>Don&#8217;t Put All Your Eggs in One Basket <\/strong><\/p>\n<p>An important investment principle of all is not to invest all or most of your money into <strong>one<\/strong> investment.<\/p>\n<p>Include multiple and varying types of investments in your <strong>portfolio<\/strong>. There are many asset classes such as stocks, bonds, precious metals, commodities, art, real estate, and so on. Cash, in fact, is also an asset class. It includes currency, cash alternatives, and money-<strong>market<\/strong> instruments. Individual asset classes are also broken down into more precise investments such as small <strong>company<\/strong> stocks, large <strong>company<\/strong> stocks, or bonds issued by municipalities, or bonds issued by the U.S. Treasury.<\/p>\n<p>The various asset classes go up and down at different times and at different speeds. The purpose of a diversified <strong>portfolio<\/strong> is to mitigate the ups and downs by smoothing out the volatility in a <strong>portfolio<\/strong>. If some investments are losing value at some particular period, others will be increasing in value at the same <strong>time<\/strong>. So the overarching objective is to <strong class='StrictlyAutoTagBold'>make<\/strong> sure that the gainers offset the losers, which may minimize the impact of overall losses in your <strong>portfolio<\/strong> from any single investment. The goal that you will have with your <strong>financial<\/strong> <strong>advisor<\/strong> is to <strong>help<\/strong> find the <strong>right<\/strong> balance between the asset classes in your <strong>portfolio<\/strong> given your investment objectives, <strong>risk<\/strong> tolerance, and investment <strong>time<\/strong> horizon. This process is commonly referred to as asset allocation.<\/p>\n<p>As mentioned earlier, each asset class can be internally diversified further with investment options within that class. For example, if you decide to invest in a <strong>financial<\/strong> <strong>company<\/strong>, but are worried that you may lose your money by putting everything into <strong>one<\/strong> single <strong>company<\/strong>, consider making investments into other companies ( Company A, Company B, and Company C) rather than putting all your eggs in <strong>one<\/strong> basket. Even though diversification alone doesn&#8217;t guarantee that you will <strong class='StrictlyAutoTagBold'>make<\/strong> a profit or ensure that you won&#8217;t lose value in your <strong>portfolio<\/strong>, it can still <strong>help<\/strong> you manage the amount of <strong>risk<\/strong> you are taking or are willing to take.<\/p>\n<p><strong> Recognize the Tradeoff Between an Investment&#8217;s Risk and Return <\/strong><\/p>\n<p>Risk is generally looked at as the possibility of losing money from your investments. Return is looked at as the reward you receive for making the investment. Returns can be found by measuring the increase in value of your investment from your original investment principal.<\/p>\n<p>There is a relationship between <strong>risk<\/strong> and reward in finance. If you have a low <strong>risk<\/strong>-tolerance, then you will take on less <strong>risk<\/strong> when investing, which will result in a lower possible <strong>return<\/strong> at any given <strong>time<\/strong>, relatively. The highest <strong>risk<\/strong> investment will offer the chance to <strong class='StrictlyAutoTagBold'>make<\/strong> high returns.<\/p>\n<p>Between taking on the highest <strong>risk<\/strong> and the lowest <strong>risk<\/strong>, most investors seek to find the <strong>right<\/strong> balance of <strong>risk<\/strong> and returns that he\/she feels comfortable with. So, if someone advises you to get in on an investment that has a high <strong>return<\/strong> and it is <strong>risk<\/strong>-free, then it may be too good to be true.<\/p>\n<p><strong>Understand the Difference Between Investing for Growth and <\/strong><strong>Investing<\/strong> for Income <\/p>\n<p>Once you <strong class='StrictlyAutoTagBold'>make<\/strong> the decision to invest, you may want to consider whether the objective of your <strong>portfolio<\/strong> is have it increase in value by growing overtime, or is it to produce a fixed income stream for you to supplement your current income, or is it maybe a combination of the two?<\/p>\n<p>Based on your decision, you will either target growth oriented investments or income oriented ones. U.S. Treasury bills, for instance, provide a regular income stream for investors through regular <strong>interest<\/strong> payments, and the value of your initial principal tends to be more stable and secure as opposed to a bond issued by a new software <strong>company<\/strong>. Likewise, an <strong>equity<\/strong> investment in a larger <strong>company<\/strong> such as an IBM is generally less risky than a new <strong>company<\/strong>. Furthermore, IBM may provide dividends every quarter to their investors which can be used as an income stream as well. Typically, newer companies reinvest any income back into the business to <strong class='StrictlyAutoTagBold'>make<\/strong> it grow. However, if a new <strong>company<\/strong> becomes successful, then the value of your equities in that <strong>company<\/strong> may grow at a much higher rate than an established <strong>company<\/strong>. This increase is typically referred to as capital appreciation.<\/p>\n<p>Whether you are looking for growth, income, or both, your decision will fully depend on your <strong>individual<\/strong> <strong>financial<\/strong> and investment objectives and needs. And, each type may play its own part in your <strong>portfolio<\/strong>.<\/p>\n<p><strong>Understand the Power of Compounding on Your Investment Returns <\/strong><\/p>\n<p>Compounding is an important investment principle. When you reinvest any dividends or other investment returns, you begin to earn returns on your past returns.<\/p>\n<p>Consider a simple example of a plain bank certificate of deposit (CD) that is rolled over to a new CD including its past returns each <strong>time<\/strong> it matures. Interest that is earned over the lifetime of the CD becomes part of the next period&#8217;s sum on which <strong>interest<\/strong> is assessed on. At the beginning, when you initially invest your money compounding may seem like only a little snowball; however, as <strong>time<\/strong> goes by, that little snowball gets larger because of <strong>interest<\/strong> compounding upon <strong>interest<\/strong>. This helps your <strong>portfolio<\/strong> grow much faster.<\/p>\n<p><strong> You Don&#8217;t Have to Go at It Alone <\/strong><\/p>\n<p>Your Financial Advisor can give you the investment guidance that you need so that you don&#8217;t have to stop yourself from investing in the <strong>market<\/strong> because you feel like you don&#8217;t know enough yet. Knowing the basic <strong>financial<\/strong> principles, having good common sense, and having your Financial Advisor guide you along the way can <strong>help<\/strong> you start evaluating investment opportunities for your <strong>portfolio<\/strong> and <strong>help<\/strong> get you closer toward achieving your <strong>financial<\/strong> goals.<\/p>\n<p>Isakov Planning Group <a href=\"http:\/\/www.isakovgroup.com\" target=\"_new\">financial advisors<\/a> bring industry leading resources and expertise to <strong>help<\/strong> clients pursue and achieve their goals. Along with expert <strong>market<\/strong> analysis from the firm&#8217;s top <a href=\"http:\/\/www.isakovgroup.com\" target=\"_new\">investment managers<\/a>, your Isakov Planning Group <strong>financial<\/strong> <strong>advisor<\/strong> will work with you to develop and deliver tailored solutions that can <strong>help<\/strong> you get on track and ultimately achieve your most important objectives, whether you&#8217;re looking to <strong>plan<\/strong> for retirement, build tax-free wealth, get your kid&#8217;s through college, or build a lasting legacy for your family.<\/p>\n<p>Author: <a href=\"http:\/\/EzineArticles.com\/?expert=Yulian_Isakov\">Yulian Isakov<\/a><br \/>\nArticle Source: <a href=\"http:\/\/ezinearticles.com\/?Understanding-The-Most-Important-Investment-Concepts&amp;id=6086273\">EzineArticles.com<\/a><br \/>\n<a href=\"http:\/\/alphaandroid.com\/\">Android apps<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>It&#8217;s always good to have at least a basic foundation of fundamental investment knowledge whether you&#8217;re a beginner to investing or working with a professional financial advisor. The reason is simple: You are likely to be more comfortable in investing your money if you understand the lingo and basic principles of investing. <\/p>\n<p><a href=\"https:\/\/www.ishmaels.net\/blog\/2011\/06\/14\/understanding-the-most-important-investment-concepts\/\">&#8220;And Now the Rest of the Story &#8211; &#8220;Understanding The Most Important Investment Concepts<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[1],"tags":[],"class_list":["post-6579","post","type-post","status-publish","format-standard","hentry","category-uncategorized","odd"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.5 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Understanding The Most Important Investment Concepts - And That was How it Went<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ishmaels.net\/blog\/2011\/06\/14\/understanding-the-most-important-investment-concepts\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Understanding The Most Important Investment Concepts - And That was How it Went\" \/>\n<meta property=\"og:description\" content=\"It&#039;s always good to have at least a basic foundation of fundamental investment knowledge whether you&#039;re a beginner to investing or working with a professional financial advisor. 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