Monday, May 4, 2009

How To Invest And Accumulate Wealth

Investing in long-term financial vehicles give you the most gains but it also puts your funds at greater risk. There is so much truth to the saying, “there is no gain if there is no risk”. Still you can reduce your chances of losing your hard earned money by researching and taking time to understand what you are buying. Would you purchase a house you have only just seen on the outside? Both of these are serious investments and you need to arm yourself with the basic knowledge about the subject. So what are the differences you need to consider when investing in bonds, stocks or mutual funds?

Before contemplating which of these options is to go for, remember the first advice and basic rule in investment –“ Invest what you can afford to lose”. Remember also that “the higher the return, the higher the risk”. Do not be in a hurry to reap high return in a short period. It pays to do research before investing.

When you are investing funds in bonds, you are technically lending your money to a borrower. Who can this be? Some of these are the Federal Government, a State, a Local Municipality or a big company. All these institutions need money to expand, to fund a federal deficit or to finance new ventures. So they borrow funds by issuing bonds. The price you pay for a bond is known as its face value. The issuer promises to pay you back in a particular day, at a fixed rate of interest stated on the coupon itself. You are safely investing in bonds; these bonds give you a yearly income until the maturity date. When the bond matures, the borrower pay you back the principal plus interest. In most cases, investing in bonds is a minimal-risk free decision.

A share of stock is a certificate of ownership purchased by individuals who are investing or buying a proportional share of the business. The more stocks you buy, the bigger the share of profits you get and the bigger your financial stake becomes. A stock’s value is affected by the financial situation of the company. Historical trends in stocks have shown that their value rises over time, although there are no sure guarantees. Also with stocks, the only assured return is if it appreciates on the open market. And while it is true that there are companies that give their stockholders dividends, they are not obligated to do so.

Mutual Funds
In this financial scenario, you join a group of investors in investing your funds to buy stocks, bonds, or anything else your fund manager decides is worthwhile. If you do sustain losses, these losses, are subtracted from the fund’s capital gains before the money is distributed to you the shareholder. The fund will not pass out capital gains to shareholders until it has at least earned more in profits than it had lost.

Wealth, however, has been described as “cash flow from other sources”. Wealth accumulation could take any of the following options:

1. Make your Money Work For You – What this means is that, you are not wealthy just because you earn a lot of money. You are only wealthy when your money works for you. To become wealthy, your main job is to acquire money and then put it to work making more money for you.

2. Add Value Continually – The key to creating wealth is simple. It is called “adding value”. Successful people are those who are always looking for ways to add value in some way to a person, a company, a product or a service.

3. Buy It Cheaper Somewhere Else – Another way to add value is to buy something in one place at one price and then make it available in another place for another price. For example, buying a product or service manufactured in Europe or Asia, importing it to the United States and making it available to people to whom it was not available before, is a way of adding value for which you can charge a higher price.

4. Improve The Life or Work of Others – All manufacturing and marketing is based on this principle of added value. All aims to add value. Performing a service that enhances the life or work of another person adds value. An accountant who saves a client’s money on taxes is adding or actually creating value. All financial success, is based on adding value. It is based on the old saying, “Find a need and fill it”.

5. Combine and Recognise the Elements of Value – All successful business is based on someone bringing together the factors of production, such as labour, capital, raw materials and management, and creating a product or service that a customer will pay a price for that is in excess of the cost of producing it.

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