Two main investment styles have emerged these days. The first is passive investing. It is characterized by investing for a long period of time. This style of investing consists in investing, for example, in the shares of a given company and holding the investment for several years without selling it. As a rule, you passively invest in large commodity, technology and financial companies – they have a lower risk of sharp declines in quotations, such companies often pay dividends.
Second Style
The second style is aggressive investing. Here, the implication is that the investor invests in riskier instruments. For example, not in the stocks of industry leaders, but in the shares of smaller companies. During market fluctuations, such securities are more volatile and can rise or decrease (i.e. they have high volatility), but with the same quality you can earn more. This type of investment requires a deep understanding of the market and a willingness to lose the money invested.
How to invest as a private individual?
An individual cannot trade on the stock exchange alone. This is done by brokers who act as intermediaries between the exchange and the investor. It is necessary to open a brokerage account, after which the account holder has the opportunity to buy/sell securities.
The brokers also offer the services of a professional asset manager. Together with a professional, you choose an investment strategy, agree on the terms of buying/selling shares, and then the manager makes decisions about your portfolio.
Profitability and risk
Investments have two key characteristics that are directly correlated with each other. These are return and risk. The higher the risk associated with an investment, the higher the potential profit can be. Conversely, relatively safe investments can never offer high returns.
For example, a bank deposit, which can also be considered an investment, or the purchase of state bonds are low-risk investments. Bank deposits are insured, and in the case of government bonds, the state is the guarantor of repayment. However, the return on such investments is also lower than the potential return on stocks, which can be affected by a variety of reasons, from market to corporate.
To illustrate the relationship between risk and reward, another example can be given. A bond with a 10-year maturity gives the buyer a higher yield than, for example, a three-year bond. The following applies: the higher the maturity of the bonds, the greater the risk the investor takes (after all, a lot can happen even in the case of government bonds in 10 years), and therefore the more he must be rewarded for this risk.
Investment portfolio and its diversification
The entirety of all investments made by an investor is called an investment portfolio. An investment portfolio may consist of shares of one company. However, analysts and experienced investors advise not to spend all your capital on one security. The investment portfolio is diversified, i.e. investments are divided between different securities to reduce risk and increase returns.
Even developed economies and large companies inevitably face a period of decline and stagnation. To protect ourselves against such situations, our investment portfolios will include not only shares, but also bonds, deposits and exchange-traded funds. Professional traders add commodity futures to their portfolios.
Stocks are among the riskiest, but also the most profitable parts of portfolios. Exchange-traded funds are the golden mean, associated with relatively low risk and a high rate of return. The protective part of the portfolio are bonds and deposits, which stabilize the portfolio in the event of strong volatility, this is the safest part of the portfolio.
In addition to diversifying assets, it is also important to allocate the portfolio to sectors or industries. The importance of this principle can be seen by taking a close look at each economic crisis. During such periods, when some stocks fall, others grow. This creates balance and keeps losses to a minimum.
What are the types of investments?
The term investment is not limited to private investments in securities or derivatives. In a broader sense, the term “investment” can be understood as encompassing all investments made by a person or enterprise, whether in cash or in fixed assets or intangible assets.
The main classes of investments are:
Real investments. These include, for example, the purchase of a ready-made enterprise; acquisition of intangible assets such as patents, copyrights, trademarks, etc.; construction, renovation, major repair.
Financial investments. These include purchases of securities or derivative financial instruments.
Speculative investments. In this case, the main feature of the investment is the rate of return resulting from the change in the price of a given asset. The principle “buy cheaper, sell higher” applies. The subject of speculative investments can be shares, in addition to them – currency, precious metals, bonds.
Venture Capital investments. These are investments in young companies with a long shelf life. Venture capital investments come with a high risk of losing your investment completely, but they can also bring huge returns to investors. An example of a successful venture capital investment is SoftBank’s investment in the start-up company Alibaba in 2000. After Alibaba’s IPO in 2014, SoftBank’s share increased from $20 million to $74 billion. An example of an unsuccessful venture capital investment is the bankruptcy of the Theranos medical project, which attracted at least $500 million from venture capitalists before its collapse.
Portfolio investments. These are investments not in one type of asset (e.g. a share of a given company), but in several at the same time, which are created as a portfolio of several securities.
Smart investments. This is called an investment in an intellectual product. These can be specialized training, research and development, intellectual property, or the creative potential of a group of people.
The opposite of investment is divestment. In economics, this is called asset reduction. Divestment can be defined as the sale of a portion of an existing business, which is what companies do when they want to focus on their core business. Divestment can also be done for moral and ethical reasons. In recent years, environmental activists have called for the divestment of oil-related assets.