Financial Investments Basics

The basic principles of investing are not as difficult to comprehend as many people believe. Almost all investments can be broken down into several large categories. Those categories include the time frame, risk, and liquidity of the investment. Educating oneself on financial investment basics is the place to start before making a life-changing financial decision.

Time Frame

One of the first issues to determine is the time frame of the investment. Is the money going to be put away for 10 years, 10 months, or 10 weeks? If it is going to be a longer term, then more risk can be taken, because time will smooth out the investment's fluctuations. If the investment is only for a short term, then there are few options besides parking the money in a mutual fund or certificate of deposit.

Liquidity

Liquidity is another concern. Along with the time frame, liquidity should be considered before making an investment. Liquidity is determined by how long it will take to turn the investment back into cash with the least conversion cost. If the money has to be available at a moment's notice, then it will be disqualified from certain fixed-term investments like certificates of deposit or annuities. But if the money does not have to be liquid, then a mutual fund or annuity could be the perfect investing vehicle.

Risk

Some investors cannot handle any investment risk, while others cannot live without some measure of risk. For those investors that are averse to risk, a simple, safe investment like a certificate of deposit or a government bond may be preferred. If risk is not an issue, then investors can reap much higher returns (at higher risk) through mutual funds and other stock trading. Real estate is a mix of conservative and risky investing, because while the trend is toward increasing value, some short-term market slumps can be difficult to muddle through.

Misconceptions

A common misconception is that mutual funds are highly risky. However, if a person has many years to invest, then mutual funds are an excellent investment choice. When people purchase a home, they assume that its value will increase. That assumption is based on a long track record for real estate. The same is true with a mutual fund. If an investor takes the time to look at a long-term track record, then they will see that the stock market has averaged 12 percent for the past 50 years. And while there may be occasional large increases or decreases, the trend over many years is what is most important when gauging a long-term investment.

Considerations

There are dozens of investment choices available to investors of all types. Banks offer certificates of deposit and money market accounts. Stock brokers offer single stocks and mutual funds. Still other companies offer annuities, real estate trusts, and various other complex investing tools. The most important thing for a potential investor is to know beforehand where the money is going, how the investment works, and how to retrieve the money. Some potential investors get sucked in with a nice sales pitch, only to realize later that they don't even understand where the money went. Find an investment professional that will not only help you choose the right investment, but also teach you how it works and answer any pertinent questions.