What are the Basics of Investing?

When you think about investing, most people think about the stock market. Stock is one form of investing. There are many other types of investments, and all are necessary to have a complete portfolio. Part of the basics of investing requires that you have a balance that varies by the amount of time you have and your risk tolerance.

Types

Look for a balance in your portfolio. Most of them contain a blend of stock, bonds and fixed instruments. Stocks show ownership in a company. Bonds are instruments where you loan a country, state, locality or company money. Fixed instruments have fixed values. Unlike stocks and bonds, they don't go up and down in value. Two fixed instruments are CDs and money markets.

Time Frame

Invest in stocks for longer-term investments. Usually the closer to the goal for the money, the less you risk it. Portfolios heavy in stock can't recover in time if the market is down when you need the money. You have to sell off at a low price and take a loss. Bonds also go up and down in value, but often not as dramatically as stock. As you approach your goal, use bonds more heavily. If you're within a few months of using the money, most of it should be in fixed investments. The basics of investing are simple when you consider the volatility of the investment.

Identification

Vary the types of stocks you use. There are several ways to vary stocks. You can divide them between value stocks and growth stocks and use the various sectors as a way to divide them. Value stocks consist of under-priced stocks compared to the return they give on dividends. Companies that give dividends are often value stocks, like banks and financial institutions. Many buy these stocks for both dividends and price increase of the stock. Growth stocks are from companies that put all their money back into the growth of the company. You buy these specifically for the price increase.

Don't put all your money in one sector. People did that in the 1990s when they saw tech stocks skyrocket. They were sad when the bottom dropped out and they lost everything.

Considerations

Use different types, time lengths and qualities for your bonds. The closer you come toward the use of the funds, the less volatile the bonds should be. High yield bonds are those companies that are either not rated or have a poor credit rating. Just like people, they have to pay more money when they borrow. Since bonds are one method of borrowing, the yield is higher. Government bonds usually yield less because of their safety. High yield bonds tend to rise in price when the stock market is good, unlike most other bonds. Bonds fluctuate in price because of interest, risk and time to redemption. If interest at the bank is only 3 percent, people pay more than face value to get a 6 percent bond. Mix up the length of time and risk levels of your bonds.

Expert Insight

Create a balance for safety. When you use mutual funds to invest, keep a balance of thirds for the maximum safety. One third should be in fixed instruments, one third in stocks and one third in bonds. The basics of investing are nothing more than balancing risk and time factors.