When it comes to investing your money there are plenty of options which primarily vary according to the level of risk you are willing to take.
High risk investments usually have a higher chance of generating more capital gain at the cost of potentially nearly all (even all) your initial investment.
Low risk investments, on the other hand, generate a stable, yet not significant, amount of capital gain with a much lower risk of losing your initial investment.
Before investing you should understand the risk involved in certain investment options.
As stated there are a number of risks that an investment can have and its important to be aware of what these risks.
The different types of risks
- Market Risk: The risk that an investment will lower in market value. Also known as systematic risk.
- Interest Rate Risk: The risk that an investment will decline in value because of interest rates fluctuations.
- Reinvestment Risk: The risk that when an investment matures it will be reinvested at a lower interest rate.
- Political Risk: The risk that a foreign investment will lose value because of political reasons.
- Legislative Risk: The risk that because of new legislation an investment will decrease in value.
- Liquidity Risk: The risk that an investment won’t be able to be liquidated when necessary.
- Purchasing Power Risk: The risk that an investment will lose value because of inflation.
- Tax Risk: The risk that because of taxation an investment will lose its value/return on investment.
Investment options and their level of risk
Safe investments options: certificates of deposit (CDs), treasury securities, and savings bonds.
Low risk investment options: fixed and indexed annuities, insured municipal bonds, and investment-grade corporate bonds.
Medium risk investment options: preferred stocks, utility stocks, income mutual funds, equity mutual funds, and blue-chip stocks.
High risk investment options: Small and mid-cap stocks, small cap funds, oil/gas/commodities, penny stocks, limited partnerships, and financial derivatives.
Investment Advice from Warren Buffet
Warren Buffet makes a very good point in the video below; people should not buy stocks without fully understanding what they are investing in.
Before making an investment you should completely understand how the investment works, factors that influence its value, etc.