As anyone who has an interest in financial affairs will be aware, there is one piece of advice that tends to follow any question about the best thing to do with your cash: and overwhelmingly, the advice is to invest wherever you can.
Knowing how and where to get started can be tricky, however, particularly if you are new to the world of investments. To help, we have put together everything you need to know to get started and to offer the best options for investing your first 10,000.
What Are Investments?
Investments are simply a way of using money today to acquire something more valuable down the line. For example: if you start with $100 now, you have two choices: place it in a savings account, or invest it.
With the former, you can withdraw your cash after around five years and, while you may have earned a little interest, you will essentially end with the same amount that you put in.
If, however, you invest that $100 into a suitable investment, you could double or even triple the amount after five years – and all without having to work any harder.
Rather than just putting money into a savings account or your mattress, you could instead use some of this cash to buy shares in an oil company that is about to boom – and this is the reality for millions of investors each year.
Over time, those companies might grow in value and when they do so, you will also have the chance to make even more money through dividends.
Essentially, investments are a much more flexible way of utilizing your money to create future income, compared to saving.
You can choose to save by making regular deposits in a bank or building society current account, but that doesn’t really enable you to build up any significant amount of wealth.
Or, you could try to earn higher returns by contributing to mutual funds or other investment vehicles. But these don’t allow you to build up equity over time. It’s only by taking part in an investment program like this that you can truly reap the rewards of your hard work in the long term.
How Do Investments Work?
So how does an investment work? Well, let’s take the above example again. Let’s say you decide to invest in an oil company, rather than sticking it in your mattress.
Instead of having immediate access to $100, you instead opt to take the money and contribute to a fund called Shell Oil.
The fund manager invests this money and then sends you monthly statements showing exactly what share of the fund you own, and how much income the fund generates each year.
That income is paid out to shareholders, based upon their annual contribution of capital. For instance, if you contributed 100 dollars per year for 5 years, then you would receive 25 percent of the profits generated by the fund for each year.
However, you could also choose to contribute less, and thereby reduce your overall earnings from the fund.
Alternatively, you could increase your contributions and therefore boost your earnings. This process continues for many years, generating additional revenue for the fund and ultimately resulting in a profit being distributed to its investors.
It’s important to note here that as well as receiving payments within the fund itself, every investor receives dividends too. So, if your initial investment is worth $10,000 and you are entitled to $1,000 per year, then your dividend will be $1,000 per annum.
Of course, as with the rest of your income, this figure fluctuates depending on the performance of the fund during the year. There are numerous types of assets that can be invested in, including stocks, bonds, commodities, real estate, private businesses, and much more.
The most common type of investment is known as equities – shares of stock owned by a business. Shares are traded throughout the market and are very liquid instruments that are considered safe.
They have historically provided great returns for investors. While they offer growth potential, they do not provide liquidity (like cash) and so investors must have some level of risk tolerance before investing.
There is no one-size-fits-all option when it comes to investment choices. Different individuals use different strategies and approaches to make informed decisions about their personal finances.
Some people start early, learning the basics of financial management to ensure they achieve their goals. Others might want to dip their toes into the world of investments, using the experience of experts as a guide.
Regardless of whether you are a first-time investor or an experienced trader, it pays to know your options.
There are four main types of investments: fixed income, equities, alternatives, and property.
Fixed Income Investments
Fixed income includes things like bank accounts, bonds, and treasury bills. These are usually created by governments around the world looking to borrow money long-term.
Bonds exist on both sides: short-term and long-term. Buying treasuries means buying an asset you believe will appreciate over time.
Most people think of equity as being the same thing as stocks. There are similarities, but there are also two key differences between them.
Equities include companies such as retail stores and manufacturing plants and represent ownership of a portion of a company while stocks represent ownership of a piece of a company.
Second, equities are bought and sold all day every day whereas stocks are traded only once a day at the open of trading.
If you buy an apple today, you own part of the apple pie tomorrow. If you go to a store and purchase a toy car, you become part-owner of that particular model. The idea behind equity is similar – you invest in something tangible and get an interest rate in return for the asset you hold.
As an example, let’s say a group of investors decides to pool together their resources to build a factory that makes widgets. Each person puts up half of the initial funds needed to commence construction.
It takes five months to finish building the factory and begin producing widgets. During those five months, the total value of the factory goes from nothing to several million dollars.
Those six investors now share equally in an amount of $3 million. Everyone has made a good decision because everyone got what he/she wanted. The factory owners took their chances and built a successful operation.
After a few years, the factory produces its best year ever and nets more than $2 million. Its employees are paid; new equipment is purchased; the factory owners take home a nice check.
The six investors each receive $1 million worth of tokens for their contribution to the project. This number represents the capital they invested plus dividends received during production. In this case, all six investors did better than expected and realized a profit.
When the factory closes down after ten years of operation, the owners sell off the factory. A buyer wants to pay $10 million for the factory.
The buyers then give back the six original contributors with $6 million in hand. The remaining $4 million is divided evenly across the six original investors.
Each person gets his or her fair share – the $1 million investment minus the $6 million returned. After tax returns have been deducted, every investor walks away with about $500,000.
Alternatives cover items such as currencies and derivatives. Currency traders make bets on which currency will rise and fall against other currencies in the future.
Currencies can be exchanged instantly and do not need to be stored anywhere else before delivery. That’s why it’s called “real-time” investing.
A derivative might sound complicated, but that does not have to stop you from getting involved. For instance, if you want to speculate on whether gold prices are going to increase or decrease in the near future, a futures contract would allow you to do just that.
So, even though it sounds daunting, there really isn’t much to know about alternatives besides knowing that certain types of investments may benefit you, depending upon your risk tolerance and financial goals.
For some investors, being able to invest quickly and easily is extremely important, and eliminates the concern about waiting days, weeks, or even longer for particular savings to grow – as may be the case in a traditional bank account.
Fortunately, alternative investments offer very competitive rates of return (as high as 12 percent per month) and require no time commitment whatsoever!
You’ve probably heard many real estate professionals claim that real estate investing is one of the oldest forms of money-making, and there is no denying that”real estate” is one of the most popular forms of investment.
Although some “fancy schmancy” homes cost hundreds of thousands of dollars, many investors prefer the cheaper route of rental properties. Experts will also typically claim that real estate yields higher profits than any other form of investment.
However, it’s not always easy finding a great deal, so these tips should help you to start:
Buy real estate that has already proven itself to attract tenants. A lot of times people like to rent a house or apartment because it makes them feel comfortable and secure, especially when they first move into a new community.
Look for rentals where there has been consistent demand over several years; you want places where rents are rising at a steady rate as opposed to ones that have decreased over the past few years.
If possible, find a property that was empty for more than three months or one that hasn’t had a tenant for at least six months. These properties are less likely to have costly repairs that need to be made.
When buying an investment property, you don’t necessarily need to live there yourself, but it’s helpful to keep an eye out for potential problems, such as water leaks, faulty plumbing, or termites.
Also, consider whether you’re willing to keep up with maintenance and repair work since this is something you’ll need to take care of once you own the place.
Understand what a landlord can charge in terms of security deposits and late fees. Depending on the state law, landlords can often charge extra costs associated with breaking leases or failing to give proper notice, and some states limit how much they’re allowed to collect. It’s best to negotiate upfront what’s expected of you.
What Is The Best Way To Invest 10,000?
Now that we have taken a look at the general world of investing, and the best options available to those who prefer to invest their money over traditional savings, just which are the best options for investing a large sum such as 10,000? Some of the most popular options include:
Mutual funds are among the safest ways to invest your money, and they allow you to pool your cash with others’ money in order to get higher returns than would be possible if you were simply investing your hard-earned money.
In fact, mutual fund companies usually promise to match whatever percentage of your initial deposit you put in. This means that you could potentially earn double or triple your money in a little over a year.
Stocks & Bonds
While mutual funds are great choices for individual investors looking for low risk, long-term growth, stocks, and bonds are both common ways to invest a larger amount of money than you normally use for saving purposes.
Both funds represent ownership shares of certain businesses, corporations, or governmental organizations. Stocks provide the opportunity to make money by collecting dividends, while bonds pay interest instead of offering income as stock does.
While the risks involved with real estate investing are greater than those of most mainstream investments, there are still multiple benefits of owning real estate that encourage homeowners all over the world to jump right in.
We have already explored the perks of real estate and, with the housing market recovering from its recent recession, now may be the time to buy real estate at low prices, especially if you plan to hold onto it for a number of years.
One final option that is extremely risky but also very rewarding is investing directly in the market itself. There are many online brokers that let individuals invest in things like currency exchange rates, commodities, and various other markets, allowing them to generate profits through day trading.
Investing in anything is far more than putting your money in a bank account. While these options offer many benefits, it’s important to factor a variety of variables into your decision-making process whenever considering where to invest your money.
By doing so, you will not only increase your chances of success when using any of these options but you will also ensure that you make the right choice for your situation