Every company on earth requires capital to maintain operations or to sustain or is already at potential risk of financial hardship. Some organization seeks short term capital whereas many looks for the long term. Unless the investor is confident about the future of the business, he will not be ready to invest big capitals. However, when a company goes public, it acquires capital investment from many investors either through a financial institution or through bank loans or angel investors.
Let us see some of the investment schemes, the risk involved and the safety measures followed to stay away from risk
Investment Funds –
An investment fund is a way of investing money under which all fund Participants invest money together to purchase securities while each investor retains ownership and control of his own shares. Investment fund involves advanced portfolio management, dividend reinvestment, risk reduction, and easy accessibility. However they are equally accompanied with few cons such as high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
It is an equity investment that characterizes fragment of proprietorship in an organization and allows you to be a part of that organization’s earnings and assets. It can be bought by humans, companies, and mutual funds. Based on market inflation, your stock price can upsurge or fall low. When you are selling the stocks at a much higher price, it is called as capital gain however on the contrary when you sell at a low price than what you have paid, it is denoted by a capital loss. Stock is a wonderful capital investment scheme to grow your money. When you invest in stable companies, the investors can grow along with the companies. At the same time, there are a lot of risks involved with stock investment.
- Reinvestment risk- It is the probability that an investor will be unable to reinvest cash flows from an investment at a rate equal to the investment’s current rate of return. It is one of the main genres in financial risk where there are no ironclad guarantees.
- Inflation Risk- Commonly known as purchasing power risk that will undermine the performance of an investment. It is a way to show how prices change over time. Stocks are particularly vulnerable to inflation risk because it is quite dependent on dividends and interest
- Longevity risk- Life insurance companies and pension funds are often faced with longevity risk which expects increased life expectancy of pensioners and policy holders. Longevity risk is a primary worry for defined benefit pension plan investors.
With many asset classes and investment products such as Equities, Bonds, shares, options and futures, bank products can offer you each of the following products in a proportion that suits your profile and situation.
- Government bonds- They are basically next to zero risk loans you can make to the government, with attractive interest rates. T-Bond is a common choice among investors which offers low-risk tolerances or a focus on generating income.
- Preferred Shares- Whenever a company wants to raise its capital they use preferred share. They carry many of the benefits of both debt and equity capital and often are classified as Fixed Income investments
- Futures- It is a legally binding agreement between two parties to buy or sell a specific quantity of shares. Trading these shares involves tons of risk including the possibility of loss greater than your initial investment.
But how to avoid these risk and what are the measures to be taken to secure your investment. There are few things to consider when you are making an investment.
- Design a financial road map – Before taking the big step, sit relaxed and analyze your financial situation. Figure out your goals and risk tolerance. Be aware that there is no guarantee to make money through investments.
- Determine the reasons for investing- It is very crucial to determine the objective of investing. Some investors are not willing to take a risk and therefore invest in low-risk schemes whereas companies which intend to grow faster obviously want to invest in high-risk investments. For these stocks and mutual funds are good options
- Be ready to take a moderate risk- It is not bad to take a little risk with small funds. A wise choice of investments offers moderate appreciation with well-balanced risks, such as balanced funds.
- Create and maintain an emergency fund- Most of the investors have emergency funds in saving to meet the needs during sudden unemployment. This should be atleast six months of your income.
There are several capital investment schemes that can help you achieve your financial goals. However every investment has its own set of features and risk factors associated with it. Analyze them carefully and reach your financial objectives.