Home > Sample Finance Papers > Investment Essay

Investment Essay

August 20th, 2009 Leave a comment Go to comments

In the United States, a society plagued by capitalism, investing has become a way of life. To most Americans it begins with opening a savings account and slowly allowing that money to grow through the compounded interest rate over the years. While it may not seem like a big step in generating more income, nonetheless, this is a positive movement in the market of investments. With the many types of investments available knowing which are reliable, or safe, or yield good returns, are just some of the questions on the investors mind. Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity.

Bank savings account, as stated before, is the simplest kind of short-term investment. The returns on savings account are low when compared to other investments, but the returns are guaranteed by the supplier, in this case the bank. Banks offer security meaning if a bank was to go broke the federal government through the FDIC (Federal Deposit Insurance Corporation) insures your bank deposits of up to $100,000. Having guaranteed returns means an investment will not lose its value in the short term unlike other investments. The bank pays interest to you account for saving your money with them. Bank fixed term investment also known as certificate of deposit is when you deposit a sum amount of money for a set period usually three, six or twelve months. The money becomes locked away for the fixed term but, in return, you get a higher interest rate than you would receive from a straight savings account. Withdrawing money before the fixed term is over could cost a penalty. With a savings account you are able to withdraw part or all of your money whenever you want, making bank savings account completely liquid. Liquidity is the ease at which an investment can be turned into cash and this property of an investment is very important. Investments that are liquid are ideal for short- term savings, or as a place to hold emergency funds. If your looking for medium to long term goals a bank savings account is not a good investment. Rather try a certificate of deposit, which are good short or medium term investment depending on interest rates. Since interest rates are always changing it??s usually good to have money on fixed term deposit.

Owning property is another popular investment, with two thirds of American households investing in their own homes. This type of investment comes with more risk then a bank savings account or certificate of deposit. Home prices usually increase over time but with any type of investment the outcome is unknown. For example, in 1986, the price of housing in Houston declined by 11 percent (Stiglitz, pg386). Renting out property can also be a profitable investment. Returns in property rental come from rental income and the increase in the value of property over time. Losses on property investments are generally not published so believing that property investments are generally profitable is a very risky assumption. The plus side to property investing is that real estate taxes, property taxes, and the interest on the mortgage are tax deductible, and the capital gains usually find a way around taxation. Property investment is usually illiquid since trying to sell property or a house could take some time.

Investing in bonds means you the investor is lending out money to government or a company. The investor supplies them money for a certain period, and the borrowers promise to pay it back at a certain interest rate. Bonds will lock your money away for a set period of time, but they can sometimes be traded. There are short-term bonds with a short period of maturity and long-term bonds with a long period of maturity. Bonds are seen as relatively safe because the investor is given a set amount to be paid. February 2003 survey by The Wall Street Journal of portfolio strategists at sixteen top brokerage firms showed that, on average, they recommended a portfolio blend of assets that includes 23.16% bonds (Wall Street Journal). Selling or trading bonds my not yield the same amount of profit since market prices rise and fall. When the market interest rate declines this makes bonds more valuable and visa-versa when the interest rate increases the bond becomes less valuable. Since the market price is unpredictable this makes long-term bonds more risky. Since the long-term bonds are more risky they produce on average higher returns.

Investment in shares of corporate stock is also very popular that can produce a great amount of profit. By investing in shares of a firm listed on a stock exchange, the investor owns part of the company and also gets the right to share in the future income of the company. Returns on stock come in two ways; first, dividends are paid out of the profit accumulated by the company over a year. Secondly, the investor can sell his or her shares of stock for more than originally paid. Gains may reflect that the company over time has grown or improved or that the investment society sees future prospects. But then capital losses can also occur. The price of shares listed for a company can vary from day to day. On a given day some shares may go up in value and some may go down in vale, depending on how investors view the prospects of each company. Also rises and falls in economic confidence or changes in a particular industry may cause the value of stocks to rise or either fall. There are ranges of factors, which influence stock prices on a daily basis stocks cannot be accurately predicted. Shares of stocks are riskier than bonds because if a firm was to go bankrupt they must first give priority to the bondholders, a required law, to be paid off as fully as possible before any of the shareholders are recompensed. But for long-term, shares of stocks yield very high returns. February 2003 survey by The Wall Street Journal of portfolio strategists at sixteen top brokerage firms, showed that, on average, they recommended a portfolio blend of assets that includes 23.16% bonds; 68.66% stocks (Wall Street Journal). Even the professional stockbrokers recommend investing more in stocks to bonds just because the returns are much more profitable.

A rising investment strategy is the mutual fund, money gathered from many different investors operated by an investment company. The investment company then purchases many different numbers of assets. There are many types of mutual funds, such as the money market mutual fund, which invest in CDs and other safe assets as in bonds and treasury bills. Treasury bills are short-term government bonds, that repay a certain amount in a short period of time and investors are able to buy them at less then face value. The only disadvantage of mutual funds is that the federal government does not guarantee them, like bank accounts are with the use of FDIC. Mutual funds also allow for a much larger diversification of investments so that on average your investments stay profitable.

Knowing what types of investments are out there doesn??t mean a person should start investing in whichever investment. Being able to make a profit through investments is a difficult task. It??s not about simply making better investment decisions than the average investor. The real challenge is making investment decisions that are strong and sound. With the stock market it??s better to invest then to trade or speculate. The stock market may seem like a casino, but if stocks are bought and sold every time they move a point or two, the market will seem like a casino and making a profit is as good as winning the lottery. Look for value, do not pick market trends or go by the economic outlook. In the end, it is the individual stocks that determine the market, not the trends or, prospects. Buying when the prices on stocks are low is a much smarter move then buying when the prices are high, which a lot of investors do. Prices on stocks are low when the demand for a particular stock is low because investors discouraged and pessimistic. Buying the same stocks when every other investor is buying them means your results, as an investor will be equal with everyone else. This is not outperforming the market, rather keeping with the trend that the investors follow which can be disastrous. Not being able to predict or control the future means as an investor you must diversify in stocks, bond, and company, even industry. Keep an open mind about all the types of investments available. There are times when stocks will sky rocket, or bonds will perform really well, and there are times to just play with cash. The fact is there is no one kind of investment that is always going to do well.

  1. No comments yet.
  1. No trackbacks yet.