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What Can You Invest in?
If you read Part 1: Introduction to Investing for Creatives, you are likely convinced that you should start investing your hard-earned show money instead of leaving it in a savings account that earns a very sad 0.05% interest per annum.
The question is what can you invest in?
First, it is important to know what an investment is and what an investment is not. Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit.
As a creative, your tools, equipment, education, training and marketing material are investments as they directly contribute to your active income of product price or professional fees.
However, the home that you live in is not an investment because it fills a basic need. The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn’t be purchased with an expectation of profit. The mortgage meltdown of 2008 and the toxic assets it produced are a good illustration of the dangers in considering your primary residence an investment.
Low-value collectibles such as comic books, toys or lottery tickets should also not be viewed as investments. However, there are individuals who view art and antiques as investments.
Presently, there is a wide range of investment opportunities, securities and assets available to investors. Different investments are suited for people, depending on one’s financial goals and investment objectives, risk profile, time horizon and amount of money available for investing.
Here are six core investments that creatives can learn about and invest in.
Stocks are the most common security when one thinks about investing. A stock is basically a piece of ownership in a company or particular commodity. You buy into a company and if it profits, you profit. If it goes into debt, you owe its creditors. You make money on the stock market by investing in companies you think will have high profits that in turn pays out dividends or earns you a capital gain when you sell the stocks at a higher price than what you bought it for.
In order to buy stocks, you need the assistance of a stockbroker who is licensed to purchase securities on your behalf. There are two general brokers available to you, online discount brokers and full-service brokers.
You can look for an online discount broker and open up an account that allows you to buy and sell stocks/options instantly with just a few clicks. This is the least expensive way to start investing in stocks. However, discount brokers provide absolutely no investment advice, stock tips or any type of investment recommendations so you need the knowledge and experience in choosing the winning stocks.
One way to practice investing strategies or to simply learn how to trade stocks and options in real companies in the stock market without spending hundreds or thousands of dollars is to sign up for a free Investopedia Simulator account. This is a simulated online broker account and you are given “US$100,000” to practice trading stocks.
Full-service brokers are the traditional stockbrokers who are also financial advisers. They help assess your financial goals and look at factors such as; marital status, lifestyle, personality, risk tolerance, age (time horizon), income, assets, debts and more. Full-service brokers then work with you to develop a financial plan best suited to your investment goals and objectives. In terms of fees, they are more expensive than discount brokers but the value in having a professional financial adviser by your side can be well worth the additional costs.
Some companies also offer direct stock purchase plans (DSPPs) where you can purchase stocks from them directly. Search online or contact the company whose stock you wish to buy, to inquire whether they offer such a plan and how you can go about buying the stocks.
Many bonds are considered the “safe” option in the investment world. A bond is basically a loan from you to whichever government or entity you are purchasing the bond from. Returns come in the form of interest on the loan you have given. Bonds are also known as fixed income securities because the interest income is paid out at periodic intervals throughout the tenure of the bond. Upon maturity, bonds are redeemed at face value and bondholders are paid 100% of face value.
Government-issued securities in stable economic systems or high quality corporate bonds issued by the economy’s top companies are arguably the best means of preserving principal while receiving a specified rate of return. The safest investments are usually found in the money market, which includes such securities as Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers’ acceptance slips, or in the fixed income (bond) market in the form of other government bonds and in corporate bonds. Corporate bonds return a greater yield than T-bills but have higher risk.
Most bond transactions can be completed through online discount broker or full-service broker. Some banks also provide customers with the service of transacting government securities, usually through Internet banking.
While deemed as low-risk investments, bond interest rates have been the lowest ever for the past decade and offer very little returns.
A mutual fund (or unit trust) is a single portfolio of stocks, bonds, and/or cash managed by an investment company on behalf of many investors.
The investment company is responsible for the management of the fund, and it sells shares in the fund to individual investors. When you invest in a mutual fund, you become a part owner of a large investment portfolio, along with all the other shareholders of the fund. When you purchase shares, the fund manager invests your funds, along with the money contributed by the other shareholders.
The benefits of investing in a mutual fund are that your risk is spread out over a portfolio of stocks and the investment decisions are made by a professional. The negatives are that it is more expensive to invest in a fund due to management fees and there is no guarantee that the fund manager will get high returns on the investments.
You can buy some mutual funds by contacting fund companies directly. Other funds are sold through brokers, banks, financial planners, or insurance agents. If you buy through a third party, you may pay a sales charge (load).
That said, funds can be purchased through no-transaction fee programs that offer funds from many companies. Sometimes referred to as “fund supermarkets,” these programs let you buy funds from many different companies. They also provide consolidated recording that includes all purchases made through the supermarket, even if they are from different fund families.
Gold is generally considered a solid, tangible and long-term store of value that historically has moved independently of other assets. Experts have proposed that gold can be used in portfolios to keep up with inflation, protect global purchasing power, reduce portfolio volatility and minimize losses during periods of market shock. It can serve as a high-quality liquid asset to be used when selling other assets would cause losses. Other precious metals like silver have similar properties but are not as highly valued.
The easiest way to buy gold is to purchase physical gold from a gold dealer. However, you need to store your gold safely either in a safe deposit box or in a safe. Storage costs can add up and eat away at your returns in your gold investment so you have to manage these costs. You can also open a gold savings account at banks or treasuries who offer such a service. This is hassle free and easy but there are yearly bank charges as well as charges when you buy or sell gold. These costs will again affect your net returns on investment.
A popular investment is real estate. Houses, apartments or other dwellings that you buy to rent out or repair and resell are investments. Choosing the right property in the right location is critical in getting returns on your property. The key is to buy an undervalued property and be able to sell it at a higher price down the line. Look out for good deals posted online, through property agents or foreclosed properties offered by banks.
While waiting for the property price to appreciate, it can be rented out in the meantime as a source of fixed income that provides a passive cash flow.
There are two options when investing in a business. One is to invest your money, time and energy into starting and running a business an investment. Entrepreneurship is one of the hardest investments to make because it requires more than just money. However, it is also an ownership investment with extremely large potential returns.
You can also invest in a business without the need for you to run it. You can look into investing your money into a start-up business that requires funds in return for a share in the business. You can also be a silent partner in a partnership by providing funds and business direction while other partners run the day-to-day operations.
An online business such as creating a niche authority site, monetizing a blog or e-commerce site is also a good investment to generate passive income through selling of products, advertising and/ or affiliate marketing.
Regardless of what you decide to invest in, it is important to research and fully understand what you are investing in. Besides, understanding the investment, you must be fully aware of the risks, returns, costs and legal/ tax implications of making the investment. The most fundamental rule is to invest in only what you fully understand.
In Part 3: Introduction to Investing for Creativebackstagebusinessacademy.com/…/part-3-introduction-investing-creatives, we will discuss the fundamental important investing concepts and strategies.