Manage Your Risk While Investing in Equities and Fixed Income
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For a smart investor, the stock market offers tremendous opportunities to become wealthier. However, to be a smart investor, you need to be knowledgeable about how market and various instruments work. Wise decisions based on your knowledge and predictions can make you richer with the movements of the market. These wise decisions are similar to availing a casino bonus each time you try your luck in an online casino.
This article explains the basic differences between the equities and fixed income instruments (like bonds) with their relative risk levels.
Equities
Buying equity of a company makes you own a small share in its capital. You gain money when the company makes profits and lose some money when the company loses money. In terms of risk and returns, this involves higher risk of losing money as well as higher chances of good returns on your investments. There is no fixed amount that will be paid to you when you sell the equity you own. Instead, it will be completely based on the NAV (Net Asset Value) of the stock at the point of selling it.
Fixed Income
Buying a fixed income instrument, such as a bond, means that you’re lending some amount to that company. This implies that you will be paid an agreed interest (coupon) over time. These bonds also have a maturity term, and upon completion, you will be paid the amount you invested initially. It involves less risk than equities and, similarly, less returns. You are not likely to lose money until the company files bankruptcy, which is often a rare scenario.
Understanding Penny Stocks
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The lure of penny stocks can be strong. After all, if you buy a stock at a penny and it goes to two pennies, you’ve just doubled your money if you sell in time. While some penny stocks prices do rise as a company’s success increases, many more penny stocks lead investors to the poor house. Here are the things to consider when investing in penny stocks.
The Misconception About Penny Stocks
Some people believe that the stock prices of all companies traded in the penny range in the beginning. However, that’s not true. Microsoft stock traded at $21 on its first day of trading. So, it isn’t the case that every successful company starts at pennies and moves its way up.
Little Information About Penny Stocks
To make wise stock investments, you need as much information as possible about the particular company. This includes sufficient historical information that gives you an idea about the company’s track record and seasonal dips. With penny stocks, you don’t have this luxury because the company is relatively new. If the company is not new and is still trading in the penny range after years have passed, then the chances that it will suddenly experience success may be slim.
Difficulty Unloading Penny Stocks
The difficulty of unloading penny stocks when you’re ready to sell is another important factor to consider. You may not have eager buyers waiting to buy the stock, particularly if the company is performing poorly. In these cases, you may be forced to wait until the price drops or consider the investment a permanent loss.
Hiring a Financial Planner
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Some situations in life require the assistance of a financial planner. Whether your business has taken off, you’ve inherited a large sum of funds that you want to invest carefully or are trying to pay off extreme debt, a high-quality financial planner can guide you in ways that you may not be able to do for yourself. Here are some considerations for hiring a financial planner.
1. Identify your needs. For example, you may have excessive debt and are in need of a financial planner who specializes in debt reduction. Or you may be interested in investing your funds, in which case the planner must have experience in a variety of investment vehicles.
2. Seek out a credentialed professional. Anyone can be good with numbers or a proficient problem solver when it comes to finances. However, you want to benefit from the expertise of a financial planner who has a background in finance and possesses years of experience in the field. Such a person can quickly assess your situation and make sound recommendations.
3. Check references. Speak to past clients to inquire about the level of professionalism, effectiveness and the reliability of the financial planner.
4. Conduct informational interviews. You don’t have to commit to the first financial planner you meet. Interview numerous financial planners. Use the informational interviews to learn about their expertise, financial strategies and interpersonal skills.
5. Hire a trustworthy financial planner. Explain your financial situation in great detail. This is not a time to be shy or conceal negative spending habits. You’ll want to reveal your financial needs and behaviors so that the planner can effectively guide you.
