Investing Guide
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Real Estate Investment Trusts
REITs invest in real estate and come in different varieties, hybrid, mortgage, and equity. The main benefits are high liquidity, high yields, and tax advantages. They can be traded on private and public exchanges. The key indicators to look into are AFFO or adjusted funds from operations, FFO or...[Read More]
Is Deflation Good or Bad
Deflation refers to an overall reduction in price levels and is associated with lower levels of investment and business, government, and consumer spending. Other reasons are high rates and overvalued exchange rates, deleveraged debt, tight monetary regulations, and reduction in money supply. Why Is...[Read More]
Guide to Trading Futures
Futures are contracts to sell or buy some asset at a set price within a pre-agreed period. They involve two types of assets – financial instruments and commodities. Some traders go long or short for speculative purposes. Benefits for TradersTrading futures involves plenty of benefits, including...[Read More]
What Is Short Selling and How Does It Work
Short selling is the practice of selling a borrowed security to buy it back when the price declines. It is not the best strategy for novice investors because of the huge risk of loss. How Short Selling WorksThis is a short-term strategy because of factors such as inflation. Traders buy securities...[Read More]Investing is an act of purchasing an item or asset with the aim of earning profit or appreciating. Appreciation refers to an increase in value or price over time. This can occur for different reasons, including interest rate fluctuations, shortages of supply, increased demand, or inflation. Depreciation is the opposite and refers to a decrease in price or value. Companies depreciate their assets for different reasons, including accounting and tax purposes. Unfavorable market conditions such as recession are another reason why assets depreciate in value.
Investing in assets and items results in changes in cash accounts due to an increase in expenses and revenues. This is known as cash flow. There are three activities that are associated with cash inflows – investment, operations, and financing. Investments and expenses result in outflows.
Basic Types of Financial Instruments
To profit, businesses invest in financial instruments such as bonds and futures and equipment, machinery, and factories. Together with financial assets, machinery and equipment represent capital. While capital is means for a company to operate and grow, common shares are securities that represent equity ownership. Preferred shares, known as preferreds, preference shares, and preferred stock, are equity securities with characteristics of debt and equity instruments. Shareholders receive dividends from preferred stock first. Common stock dividends are paid after that. Dividends are payments that corporations or companies make to their shareholders.
Shareholders, Revenues, and Profits
Stockholders or shareholders are institutions, companies, or individuals that own one or more shares in a company. They are the owners and have the potential to lose or profit depending on how the company performs. There is a difference between profit and revenues, however. Businesses profit from the sale of goods and services and the disposition of assets, including real estate, bonds, and stock. In this case, profit is referred to as capital gain. Turnover or revenue refers to the income that a business receives from the sale of services and goods, i.e. from its normal operations. Revenues are used to calculate the company’s net income by adjusting for taxes, interest, depreciation, expenses, etc.
Earnings Per Share to Measure Profitability
Whether a company is performing well is measured by its earnings per share, which serve as an indicator of how profitable the business is. EPS is also used to compare companies. The P/E ratio is another indicator of the performance of a company. It compares the current share price to the earnings per share. A high price-earnings ratio indicates a higher potential for earnings growth.
Indicators of Financial Performance
The financial performance of businesses is also assessed by the expenses and revenues incurred. This is reflected in the financial statement, also known as earnings statement and statement of financial performance. The balance sheet represents a summary of the liabilities, shareholders’ equity, and assets of a business. Together with the cash flow and income statements, the balance sheets are key elements of the financial statement.
In the balance sheet, a negative value for net worth means that losses exceed the equity. Net worth represents the assets of a company less the liabilities. For businesses, it is called book value or shareholders’ performance.
Types of Growth Strategies
Businesses use different strategies for growth. Start-ups, for example, use various sources of funding, including venture capital. Investors offer financing to companies with growth potential. This is a form of capital provided to high-risk and high-potential businesses. In addition, young, small companies often use initial public offerings to attract capital. Issuers use the services of underwriting firms that offer advice on whether to issue preferred or common securities. They assist companies to determine the timing and offering price as well.
Investment and Debt Instruments
Investors use other financial instruments to make profit. These include futures, certificates of deposits, and bonds such as convertible bonds and junk bonds. Government and corporate entities use bonds to borrow money over a specified period. This is a debt instrument with a fixed rate of interest. Certificates of deposit are offered by credit unions, thrift institutions, banks, and other entities. Bearers are entitled to receive interest and CDs have a maturity date. The term varies considerably and can range from 1 month to 5 years. Treasury bills are a short-term debt instrument and a money market security with a maturity of up to 1 year.
Warrants, Futures, and Other Instruments
Investors use various instruments to make profit, including options, futures, warrants, REITs, and mutual funds. Warrants are securities that allow investors to purchase underlying stock and have an expiration date. Options are a type of derivative that gives buyers the right to sell and buy financial assets and securities. They are a versatile security that is often used for speculative purposes. Speculation refers to the act of conducting transactions and buying and selling assets with the aim of making profit. Day trading is one strategy that investors use when trading financial instruments. This involves speculation in securities whereby they are bought and sold within a single day.
There has been increased speculation in the futures markets as well. A future is a contract that obliges one party to buy an asset such as a financial instrument or a commodity. A REIT is another investment vehicle and a trust that focuses on real estate mortgages and real estate. The main benefits for investors are high liquidity and yields.
Hedge Funds and Strategies
A hedge fund is another instrument that employs advanced strategies. These include long position, short position, as well as derivative and leveraged positions. The term long position refers to the purchase of currency, commodity, or stock that is expected to increase in value. A short position is the opposite – selling currency, commodity, or borrowed security when its value is expected to decrease.
Mutual Funds Offer Stock Market Exposure
Mutual funds are a financial vehicle that collects funds and invests in money, bonds, stocks, and other securities. Index funds are often in the form of exchange-traded or mutual funds. The main advantage is that they offer investors a broad stock market exposure. Exchange-traded funds hold different types of assets, such as bonds, commodities, and stocks. Oil ETFs are one type of fund that consists of oil-related indexes, derivative contracts, futures, and oil company stocks.
ETFs, Tax Efficiency, Low Costs
ETFs are a preferred investment instrument because of the low costs involved. They are tax efficient, have common features with stocks, and are traded on the stock exchanges. The goal of stock exchanges is to enable traders to buy and sell securities such as bonds and stocks. The US stock exchange is called NASDAQ and represents a computerized system that aims to facilitate transactions and trading.
DJIA or Dow Jones represents a price-weighted average of stocks of companies such as Microsoft, Exxon, Disney, and others. These stocks are traded on NASDAQ and the NYSE. S&P 500 is another important index that includes the stocks of major publicly traded companies in the United States. The index includes 500 stocks that are chosen for industry grouping, degree of liquidity, market share, and other factors.
The forex market is different from the stock exchanges in that it allows different entities to buy and sell international currencies. The main goals of the foreign exchange market are to enable currency conversion and facilitate transactions.
Derivatives and Investing in Precious Metals
Generally, investors use financial instruments that are referred to as derivatives. Their value is derived from international currencies, rates of interest, etc. People also buy penny stocks, which are traded at low prices. They represent shares in small companies and have a low market capitalization. Another way to make profit is to buy precious metals such as silver and gold. Gold is considered a good purchase because it offsets the effect of exchange rate fluctuations and inflation. Some metals and other commodities such as coal, oil, iron ore, and gold are actively traded on the derivative and spot markets. In essence, commodities are goods and services produced by companies.
Strategies and Market Conditions
While there are different financial instruments, individuals and companies choose their investment strategies depending on the market conditions. Investors react differently to bull and bear market conditions. A bull market is where the value of different securities is on the rise, rising quicker than the historical average. Most people believe that prices will continue to increase. Therefore, the demand for securities is high, and the supply is low. Bull markets occur in times of economic growth or recovery. A bear market, on the other hand, is one in which prices fall and are expected to fall. It is characterized by high inflation, unemployment, and economic slowdown. People spend in both cases – there are bullish and bearish investors. One widely used strategy is called asset allocation. It is used by people who aim to balance rewards and investment risk. They select a portfolio and types of securities based on a timeframe and their risk tolerance. Investors choose from different asset classes that are characterized by different yields and risk. These include commodities, real estate, and intangible and tangible assets. The latter include fixed and current assets such as equipment and machinery, buildings, and inventory. Intangible assets form another category and include software, patents, trademarks, stocks, goodwill, and others. Basically, these are assets that give companies a competitive advantage.
Finally, seasoned investors use different instruments to measure the efficiency of their investments. ROI is one tool to evaluate the profitability of an investment. It takes costs and returns into account to calculate the gains from an investment.