Before you can make a decision on how to invest $400 or any amount of funds, it is extremely important to understand the different types of investment available. There are several options available, all with different levels of risk versus return. Understanding the fundamentals and analyzing the risk/reward ratio is the first step in building a balanced investment portfolio that meets your needs.
Some of the main types of investment are divided into cash, stocks (stocks), debt securities, derivatives, mutual funds, commodities, and real estate.
Cash investments include savings accounts with financial institutions, Treasury bills, and certificates of deposit. These types of investments generally pay a low interest rate and are generally low risk. The only time they are risky investments in periods of inflation.
Buying shares (shares) makes you a co-owner of the business and entitles you to a portion of the profits generated by the business. Stocks are more volatile and therefore riskier than bonds. Stocks also have different levels of risk and return depending on the particular company you invest in. For example, so-called “blue-chip” companies are considered lower risk, but also lower return than smaller capital companies.
Investments in debt securities provide returns in the form of fixed periodic payments and a possible capital increase at the end of the investment. It is considered a safer and lower risk investment tool than stocks; although yields are generally lower than other securities.
Derivatives are (financial) contracts that are derived from the value of the assets on which they are based. Derivatives can be in the form of futures, options and swaps. They are used to reduce the risk of loss resulting from the coverage. The hedge protects against fluctuations in the value of the underlying assets.
Mutual funds are a collection of stocks and bonds. It encompasses payment to a professional manager, who selects specific securities on your behalf. The biggest advantage of this investment is that you do not have to be involved in monitoring the investment; The professional manager will select and monitor investments and stock changes that match your desired risk and reward profile. This assumes your fund manager is experienced and has the correct credentials.
Commodities are another important type of investment. The typical products traded in the market are agricultural and industrial products. These items must be in a basic, raw, unprocessed state. High risk and returns are associated with commodity trading; however, trading commodity futures requires a high level of knowledge and in-depth analysis of the underlying commodity.
Finally, there are investments in Real Estate. This type of investment is long-term, and returns are earned through capital growth or rental income. Real estate can take the form of residential or commercial properties. Entry into Real Estate is the biggest hurdle with fees, deposits, etc. With only a few hundred dollars to work with, direct entry into this market will be difficult without the government grants offered in some countries and states.
When making your investment decisions, you will not only have to consider the risk profile pays return. Two other important factors are the duration of the investment and the liquidity of the funds during the investment. Liquidity refers to the ease with which funds from an investment can be transferred, for example, if you need the funds for another purpose at any time, a cash investment such as a savings account may be the most suitable investment.
With all these options, investing your funds the right way is a difficult task and even if it’s $400, $4000 or $4 million, expert advice from a financial planner or accountant is usually a good way to go.