Investing is when you put your money in assets such as stocks, bonds or real estate with the goal of generating income or appreciation. For example, an investor might buy stocks believing that their price will increase or they will collect stable cash flows in the form of dividends.
Please note that the opportunity to earn more money comes with additional risks and before making an investment you should understand what is your risk tolerance i.e. what is the level of risk you want to take. Different investments bare different risk levels.
There are different types of investments where you can put your money. Some of the most common investment types are stocks, bonds, ETFs and Real Estate.
When you invest in a stock, you’re buying a small piece of ownership in a company. If you own a stock, that makes you a shareholder. An individual’s stock ownership represents his or her proportionate interest in a company. For example, if a company issues 100 shares of stock, each share represents 1/100, or 1%, ownership position in the company. A person who owns 10 shares of stock owns 10% of the company; a person who owns 50 shares of stock owns 50% of the company.
As a shareholder, you can receive returns in two main ways:
- The price of the stock may increase, and you will be able to sell stocks at a profit.
- The company may distribute some of its earnings to stockholders in the form of dividends.
Investments in stocks offer relatively high returns. Stocks have consistently proven to be the best way to build wealth over the long term. U.S. stocks have outperformed bonds and gold over the past 4 decades. According to global investment bank Goldman Sachs S&P 500 (which measures the performance of top 500 US companies) returned 13.6% on average over 2010-20, which means that if you invested US$ 5,000 in S&P 500 index (for example ETF: SPY) in 2010, your investment would be worth c. US$ 18,000, 3.6x higher than your original investment.
Please note that stocks are considered relatively risky investments, as the stock price may not increase (during crisis stock prices collapse) and there is no guarantee you'll be paid dividends.
A bond is a loan you make to the bond issuing entity – Government, municipality or a company. When a company needs money for their business they can gather money from their owners or local commercial banks or they can tap capital markets by issuing stocks or bonds. When a company issues bonds publicly, they are essentially borrowing money from the investors, in return, that issuer promises to the investors (bondholders) a specified rate of interest (coupon rate) and to repay the initial amount (face value) after a certain period of time.
Compared to stocks, bonds are less risky investments as they can provide predictable income stream in the form of coupons, which are paid quarterly or semi-annually. In addition, initial investment is also preserved as the issuer promises to pay the face value when the bond reaches maturity (the last date when the face value is repaid). As with any investment, bonds have risks such as default risk, however in case of bankruptcy bondholders have priority over shareholders i.e. during the company liquidation first bondholders and other creditors will receive payments, while shareholders are left with the remaining assets. The default risk varies between different issuers, Governments have the lowest default risks while companies bare higher risks depending on their financial strength. Notably, credit rating agencies such as S&P Global Ratings, Moody's, and Fitch provide ratings of different issuers with ‘AAA’ being of the highest quality while ‘CCC’ is the lowest credit rating.
ETF is an investment fund that combines various assets such as stocks, bonds, currencies or commodities in one basket. Like stocks, ETFs are traded on stock exchanges. ETFs are designed to track the performance of a specific index, like the S&P 500 index for stocks, the US Dollar versus the Euro for currencies, the price of gold for commodities or cryptocurrencies.
ETFs enables investors to invest in multiple companies or securities at the same, without having to analyze individual securities. So instead of buying a dozen or hundreds of individual US technology stocks, for example, investors can invest in the US technology sector with a single ETF, such as the Dow Jones U.S. Technology ETF.
- Low operating costs – compared mutual funds ETFs generally have lower operating costs, because ETFs typically are not actively managed.
- Liquidity and transparency - ETFs are highly liquid and offer transparent pricing with tight bid/ask spreads.
- Diversification - ETFs offer built-in diversification in a single security allowing you to spread your investments across different asset classes; segments within an asset class; and sectors within an asset class.
- ETFs may be limited to larger companies. In some countries, investors might be limited to large-cap stocks due to a narrow group of stocks in the market index.
- Although ETFs combine various assets, they are still affected by volatility.
- If an ETF is thinly traded, there can be difficulties getting out of the investment, depending on the size of your position in relation to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and ask price. With so many new ETFs coming to the market, you need to make sure that the ETF is liquid.
- ETF costs. If you're interested in investing in ETFs, you should pay attention to expense ratio, which indicates how much of your investment in a fund will be deducted annually as fees. ETF expense ratios are typically less than 1%, that means that, for every $1,000 you invest, you pay less than $10 a year in expenses.
- ETFs track a broader market and generally pay a lower dividend than high-yielding individual stocks or groups of stocks.
Real estate investment is the traditional form of investment and is particularly popular in Georgia. When you invest in real estate you buy property made of land and any buildings. There are 4 major real estate categories: residential, commercial, industrial, and land. You can invest in real estate directly by purchasing property or through Real Estate Investment Trusts (REITs) which are companies that own different types of property on behalf of shareholders/investors (just like stocks REITs are also traded on stock exchange). From real estate investments you get return either by renting it out or from the appreciation of the property value.
Please note, that real estate investments are associated with risks as during crisis periods real estate prices might collapse, while vacancy rates might increase.
Please consider, all investment carries risk. Past performance is not indicative of future returns, which may vary. Investments in stocks and ETFs may decline in value, potentially leading to a loss of principal. Online trading has inherent risk due to system response and access times that may be affected by various factors, including but not limited to market conditions and system performance. An investor should understand such facts before trading.