To many, investing refers to buying things on credit. This is a typical practice with credit cards where you are given a credit limit that is based on your income. When your limit is reached, if you do not pay off your outstanding balance, your credit limit immediately drops to zero. So, the money you put into a credit card must be used for purchases, otherwise, you will only be paying interest charges on the amount still owed. This makes credit cards a risky investment because if you are unable to pay off an outstanding debt soon after it is incurred, you will have to face high interest charges on the unpaid balance. When you are looking for investments that offer high potential returns, you should avoid credit cards and look elsewhere.
In contrast, investing refers to the purchase of shares or bonds in a company like a stock. These types of investments are safe because the value tends to increase over time, just as your savings account does. There is no risk in regard to your investment as you do not stand to lose anything unless the company goes out of business. There are other investments, however, that are considered safer than savings accounts and these include real estate and bonds.
Diversifying your portfolio is perhaps the most important aspect of investing. This simply means spreading your risk and investment exposure over all the different assets and financial vehicles that you own. By doing this, you can reduce the overall risk of your portfolio and make sure that each of your investments performs well in terms of growth, even if they are all losing. This is often the most important aspect of investing as many people tend to invest their entire net worth in one particular investment category. However, if you do not diversify, you may not be able to realize maximum growth from your investments.
One way to help you save more money while investing is to set aside a portion of your monthly income in a savings account and use it to invest. You can opt for long-term bonds or save up money for a specific purpose such as paying off a mortgage early or buying a car. Alternatively, you may decide to save up for a large purchase such as a dream home or a new car. In fact, saving towards major purchases will ensure that you are able to take advantage of low interest rates and thus save a lot when it comes to investing.
Another way to diversify your portfolio is to make use of an ETF. An ETF is an exchange traded fund that has been specifically structured in order to help investors diversify their portfolios. The various ETFs will have a wide range of different investments, so you can choose from stocks, bonds, commodities and even currencies. The nice thing about using an ETF is that you can easily control how much money you spend on each of your investments. Investing in just one type of ETF will help you diversify your portfolio.
Lastly, you need to take a look at your time horizon. Like stocks, in order for you to maximise your investment return you have to be willing to wait for a long period of time before you see any results. For instance, if you want to make use of a bond index, then it would take quite a while before you will be able to sell it in order to benefit from a bond index investment return. With the bond index, you can wait as long as you like and still get a decent bond investment return; however, if you invest in stocks you will have to be ready to sell them before a certain point of time because of the high market liquidity.