Investing
covers a wide range of activities; people can invest their
money in various types of investment ranging from fixed deposits
and stocks (which are fairly liquid assets), to property and
gold (which are less liquid). Investing also encompass taking
very conservative positions to aggressive speculation.
In
general, investment involves the commitment of funds to assets
that will be held over a long period of time. Investors (as
opposed to speculators) would normally have time horizons
that extend beyond a period of six months or a year. In making
the decision to commit their funds for such a long period
of time, they would wish to derive a reasonable return on
their investments. The return that they can earn from investing
in the various types of assets including stocks, bonds, derivative
securities, property and others, is known as the rate of return.
This return must compensate investors for-
| 1) |
opportunity
costs of time - also known as time value of money, |
| 2) |
expected
inflation (which may erode their purchasing power in the
future), and |
| 3) |
the
uncertainty or risk associated with the investments. |
Why
do investors invest?
The simple answer to that is to make more money, that is to
take the pool of money that they have, and to make it grow
in value. In order to achieve this, investors must have a
clear understanding of the investment process, the basics
of making investment decisions and also an appreciation for
the basic techniques involved in analysing investments.
The
investment decision-making process involves taking into account
the basic nature of investment decisions. How do investors
decide whether to invest or not in a particular investment?
Shares have produced on average, significantly higher returns
over the years compared to fixed deposits or bonds. But, should
investors invest all their money in shares in order to realise
higher returns? Or should they diversify and invest in other
assets such as bonds and derivatives?
The answer
to this lies in the fact that, in order to realise higher
returns, investors must bear higher levels of risk. Therefore,
underlying all investment decisions is the tradeoff between
risk and return - the higher the risk, the higher the return.
As
such, in deciding on investments, investors should consider
the risk and return involved. |
