Investing means purchasing an asset that is expected to produce income or increase in value. It is different from saving, which is a short-term loan to a bank or other financial institution, often with minimal return prospects. While saving is typically safe, investing may require that you take on additional risk. However, this risk often justifies the expected returns. Generally, the higher the risk, the higher the returns.
Your profile as an investor indicates your goals and objectives, as well as your risk tolerance. Your risk tolerance is simply how much loss you are willing to withstand in your investment portfolio. This will vary from investor to investor and is influenced by your age, investment goals, and income. These are the three types.
- Aggressive: An Aggressive investor is someone with a high tolerance for risk. With advanced knowledge of financial markets, this person is willing to make investments with more risk and as such should expect the highest rates of return.
- Moderate: The Moderate investor has a fair understanding of the stock market and is willing to take on some risk.
- Conservative: An investor with a Conservative profile prefers to play it safe. With a lower tolerance for risk, this person takes on as little risk as possible, receiving modest returns.
With this information, your financial advisor can help you to determine the appropriate types of investments to help you achieve your goals.
Some of the key principles involved in investing include setting SMART (Specific, Measurable, Achievable, Realistic, Time bound) goals and knowing your risk tolerance. It is also important to find the right financial partner to guide you. Our subsidiary, VM Wealth Management Limited, supports clients with generating and preserving wealth. They’ll develop the right investment strategy for you, based on your goals, risk tolerance, and timelines.
Some Investment Terms
Here are some basic terms to help you get a handle on investments and the financial/stock markets.
Asset: Anything you own that is of value, such as a house, land, or car. In investing, assets include bonds, stocks, cash, commodities, and so on.
Asset Allocation: How much of each asset is in your overall portfolio.
Bear Market: A market in which most investors are selling as they expect asset prices to fall. In a bear market, prices trend downwards.
Blue Chip Stocks: Stocks or shares of well-established companies with a reputation for consistently paying dividends.
Bond: A debt instrument in which an investor loans money to a company, government, or other entity for a period, in exchange for interest payments and a return of their principal on agreed dates.
Bull Market: A market in which most investors are buying because they expect asset prices to rise. In a bull market, prices trend upwards.
Dividends: A portion of a company’s profits which is paid to shareholders periodically.
Equity: Also known as a Stock or Share, represents ownership in a company.
Portfolio: A collection of the various investments owned by an individual investor or institution.
Unit Trust: A collective investment scheme in which funds are pooled and invested in different assets (stocks, bonds, real estate and money market instruments) and managed by a professional fund manager with oversight from a trustee.