Lately, the value of currency has declined rapidly. May it be the US dollar or the British pound – almost every currency has experienced a downward trend because of uncertain economic conditions. With the declining value of money, saving doesn’t seem like a fruitful option. So, how about you invest money? Perhaps, you can purchase debt instruments like bonds or T-bills. Likewise, you can start buying shares and earn lucrative returns in the form of dividends.
Most people think investment requires heaps of cash. Well, thanks to the democratization of investment, you can become an investor with as little as $10. Mutual funds and fractional shares are two of the cheapest investment options with minimal risk exposure. Hence, remember that no amount is small to invest when time is on your side. Still, you have to make investment decisions carefully. From determining your risk appetite to learning about investment options – you should be familiar with the finance world inside out.
However, if you don’t know much about it, have a look below. Here we are highlighting five tips for smart financial investment.
Create an investment philosophy
Unsurprisingly, investment decisions aren’t something you make on the go. Everyone needs an objective for investing to make informed decisions. People who see investments as an alternative for savings try to opt for less risky options. Similarly, people wanting to build wealth opt for financial securities. In simple words, we call this an investment philosophy. Without this philosophy, you might end up investing money wherever it seems right.
Now, the question is how to develop an investment philosophy? If you don’t know much about financial markets, look for advisors within your region. A quick Google search with the correct keywords always comes in handy. Perhaps, if you live in Australia, try searching for financial advisor Brisbane to find someone who knows the Australian market inside out. You can explain your financial goals and objectives to the advisor, and they will unfold suitable investment options.
Explore investment options
When it comes to investing money, most people think of a deposit account. Although deposit accounts offer a stable interest rate on savings, you can make much more through other investments. Hence, before calling the shots, explore investment options that align with your risk appetite. Listed below are a few you might want to consider:
- Foreign exchange markets: Today, forex is the most liquid and decentralized financial market. You can trade in currencies and capitalize on price fluctuations. For instance, if the USD is depreciating against EURO, you can purchase dollars. Once the dollar regains its position in the market, you can sell it at a profit.
- Bonds: A bond is like a loan given by an investor instead of the bank. In turn, the investor receives interest for providing the loan. Typically, the interest on the bond is higher than market interest, offering investors lucrative returns.
- Stock markets: Buying shares of companies allows investors to earn a handful of dividends. In addition, if you sell shares at a higher price, you can even enjoy massive premiums.
- Cryptocurrencies: Coins like Ethereum and Ripple are making waves in the crypto world. Although the price fluctuations are risky, cryptocurrencies can yield massive returns on investment.
Reduce risk through diversification
Believe it or not, there will always be a risk when investing in financial markets. But you can always mitigate the risk and reduce the likelihood of losses through diversification and asset allocation. In other words, never put all your eggs in one basket or money into one investment option. No matter how great the stock market performs, you have to create a diversified portfolio. For instance, if you have to invest $10,000, put $4000 in the stock market, $3000 in securities, $2000 in deposits, and the rest in deposit accounts. If any of the markets crash, your entire investment won’t be at stake.
Besides this, try to diversify within the financial markets as well. Instead of buying all stocks of the same company, invest in different businesses. For instance, you can invest in the manufacturing, textiles, IT, and automobile industries. Likewise, buy bonds, T-bills, commercial deposits, and different other financial instruments. In addition to mitigating risk, diversification offers more lucrative returns.
Learn the art of hedging funds
Despite having a low risk tolerance level, you can still invest in risky financial instruments through hedging. It is a way of using market opportunities to your advantage and mitigating the risk. For starters, use forward contracts. If you have purchased a volatile stock, sign a forward contract and sell it at a future date. For instance, if you bought the share for $250, consider selling it at $300 after six months. Whether the price is $200, $250, or $400 after six months, you will sell it for $300 and earn a premium of $50.
Moreover, you can even create a limit order to buy and sell the stock with restrictions. Perhaps, you can deal with a seller who won’t buy the stock above $170 regardless of the market price. Likewise, you can deal with a buyer so that you won’t sell stock below $250. Therefore, you can buy at a lower price and then sell when the market is performing well. These hedging instruments haven’t only made trading straightforward but ensure investors don’t drown in losses.
Manage market downturns
Post the pandemic, global markets have become extra volatile. The interest rates dropped massively, and oil prices have declined, leading to ups and downs in financial markets. Instead of putting your investment decisions on hold because of fluctuations, you have to manage the downturns. As markets are recovering now, use this time to sell the shares. The stock prices have gone up while interest rates are increasing again, which means more people will be willing to buy shares.
For buying securities and stocks, you have to wait for the market to crash. Once the share prices are at an all-time low, put your money in the stock market. Most investors hesitate to invest in a downturn, but financial markets always emerge back stronger. And buying shares at low prices will let you earn a high amount of premium while selling. But remember, investments are for the long-term; hence, avoid making decisions in haste.
Undeniably, financial markets can be a bit tricky and confusing. Therefore, ensure you have an advisor by your side and keep learning about investments. In addition to defining your investment objectives, determine which option best fits your risk appetite. Likewise, learn intelligent risk mitigation techniques such as hedging to reduce the likelihood of losses. Having an in-depth understanding of how investments work will give you an edge in the market while letting you earn profitable returns.