Course 5:Investing ABC
Define your investment goals
What do you want to accomplish through your investments? Try to answer the following questions before you make an investment:
Why do I need or want to invest?
How much can I afford to invest?
How much return do I need?
How much risk am I willing to take?
Determine your risk tolerance level
How comfortable would you be if your investment lost value? Risk tolerance
is your ability and willingness to lose some or all of your original investment
in exchange for greater potential returns. An aggressive investor, or one with a
high-risk tolerance, is more likely to risk losing money in order to get better
results. A conservative investor, or one with a low-risk tolerance, tends to
favor investments that will preserve his or her original investment. In the
words of the famous saying, conservative investors keep a "bird in the hand,"
while aggressive investors seek "two in the bush."
Risk of Various Investment Instruments
All investments, depending on its type, involve risks. Generally speaking:
Cash and cash equivalents - Savings deposits, certificates of deposit, treasury bills, money market deposit accounts, and money market funds are often regarded as safer investments and chances of losing money on an investment in this asset category are generally lower.
Bonds - Bonds are generally less volatile than stocks. However, you should keep in mind that certain categories
of bonds offer high returns similar to stocks. But these bonds, known as high-yield or junk bonds,
also carry higher risk.
Stocks - Stocks are generally perceived to have more financial risk than bonds in that bond holders have a claim on firm operations or assets that is senior to that of equity holders. In addition, stock prices are generally more volatile than bond prices.
Securities offered in equity crowdfunding platforms generally have a greater risk than stocks, bonds, and cash and cash equivalents, due to its illiquidity, risk of dilution, greater risk of failure and fraud.
If you intend to purchase securities offered in crowdfunding, it's important that you understand you could lose some or all of your money before you invest.
Importance of Diversification
"Don't put all of your eggs in one basket." Diversification is an essential part of investing. Whether investing in equity crowdfunding or stocks, the same rules apply! Diversification is to create a portfolio that includes multiple investments in order to reduce risk. By including diverse asset classes including cash, bonds, and securities that cover the full spectrum of potential risks and returns, the diversification can help protect an investor's portfolio against losses.
Diversification is to spread your money among various investments in the hope
that if one investment loses money, the other investments will more than make up
for those losses.
Do your homework
Never put money in an investment you don't understand. It pays to do your
homework. There is risk associated with investing in equity crowdfunding, so
before making any investment, you should conduct some research.
Before investing in a company, study a company's fundamentals!
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