You’ve probably heard the old expression, “Nothing ventured, nothing gained.” Basically, the expression means that if you don’t try, you won’t succeed. “Nothing ventured” is probably the better way to go, however, if you don’t know what you’re doing. But as the adage says, if you don’t venture, you’ll surely never gain – and most people want to gain.
How do we solve this problem? For starters, you can minimize risk by acquiring knowledge. Before you venture into investing, you need to determine two things: your personal risk tolerance and your needs and goals. In order to do this properly, you need to understand the different types of investments and the amount of risk involved with each.
Types of Investments
When you purchase a stock, that stock essentially represents part ownership in a corporation. Stocks, depending on the size of the corporation, fall into a number of categories, including growth stocks, value stocks and capitalization stocks. They depend on the size of the company, its prospects and the current state of the market.
Bonds are essentially loans issued by you to the government or a company. As with most loans, they are subject to interest. When your bond matures, the principal plus interest will be repaid to you.
When investing in a commodity, you are investing in a particular good. Commodities include things like copper, gold, wheat, corn and oil. Investing in commodities can be risky; they are not meant to be short-term investments.
GICs, or Guaranteed Investment Certificates, involve investing a set amount of money for a certain amount of time. GICs are “guaranteed” because you will always get your initial investment back. Similar to mortgages, you can choose either a fixed rate GIC or a variable rate GIC for terms of five, seven or ten years. In most cases, you will have access to your money and the interest it has accrued at the end of the term. Sold by banks and trust companies, GICs are a safe option because they offer both stability and growth, they are flexible in terms of rates and investment terms, and they have tax benefits. For more information on GICs, check out this GIC guide.
We cannot rightly talk about investments without talking about risks. Although there are all types of risks and benefits to investing, there’s no one correct way to invest. Ideally, you’re looking to strike the fine balance between risk and reward. Before making an investment, you need to determine your own risk comfort level. You can do this by considering the following factors:
- How old you are
- If you have a family and how young your children are
- How much money you make
- Your financial goals
Remember to think ahead – making solid investments means considering the risks not only for today, but also tomorrow.
Types of Risks
Economic risks – If the economy suffers a downturn, financial markets all across the board are usually affected. Some investments vehicles have an inverse relationship – typically when stocks go down, commodities go up – but trying to predict these types of movements should be left to the experts.
Industry risks – Sometimes specific industries suffer a downturn. If this happens, related industries can suffer as well.
Inflation risks – The long term value of an asset, such as a government bond, may not keep up with inflation.
Credit risks – If the issuer of the investment does not live up to its financial obligations, you could lose your invested capital, as well as its expected returns.
Market risks – There is always the possibility that your investment will decline in value. If you try to resell, you could end up getting less than you paid for it.
Tax risks – Sometimes high taxes are placed on investment income. With fewer funds to go around, profits wane.
If you’re new to investing, try investing in GICs since their security is ensured. Learn as much as you can about your potential investment before making a final decision. Know yourself. Knowledge can be powerful – and, in this case, profitable.
Writer for RateSupermarket.ca