Many people invest money for different reasons. It could be that they want to put their money away for the future, that they want to get an income from their money so they do not need to use loans, or they want to buy something that they hope will increase in value in the future. However, investments are risky and it is important to be aware of the benefits and risks before taking out any sort of investment.
What are the risks?
When you invest money, you buy something with your money that you hope to go up in value. This can be anything from a piece of art to a share of a company. However, whatever you buy, there is no guarantee that it will actually go up in value and some things are riskier than others. For example, if you decide to buy a house in a good area that you know well and rent it out knowing there are lots of people looking for rental property, then that could be less risky compared with buying a piece of expensive art from a new, young artist that may or may not become famous.
These are two extreme examples and there are many different types of investments that you can choose from and they all carry different levels of risk. Some people will use a financial advisor to help them to choose. If you tell them how much risk you are prepared to take, they will then advise accordingly. It is often the case that a higher risk investment will give a bigger return and a lower risk investment will give a lower one but this is not always the case. There are so many things that can influence the value of an investment that they can be quite unpredictable. Obviously, the higher risk investments, as well as giving the possibility of a higher return, will also give the possibility of you losing the money you have invested as well. This is because, if the value of the item you have bought goes down, you will not get back all of the money that you invested. Even if you do get it all back, there may be fees when you sell them or for managing your investments so that could also mean you do not make any money. If the value does go up, you will have to pay capital gains tax on the money that you make so that will reduce the return that you get as well.
In order to reduce the risk, investments should be made for a significant period of time. This is because their values tend to fluctuate and if you keep them for longer, the effects of those fluctuations should even out and this will mean that you will not be so likely to see a loss. However, a significant period of time would normally refer to a decade or more, which means that you need to make sure that the money they you invest, you can afford to tie up for a significant period of time.
What are the benefits?
After reading the above it may seem like there are not many benefits to investing. However, if you have a chunk of money or want to make a regular payment for a long time period so that you can use any gains that you make in the future then this can be a good way to do so. It could be something that people do to save up towards retirement, for example, or for their children so that they have money to buy a home when they are older.
The potential gains are much bigger than if you use a savings account and this can be much of the appeal for a lot of investors. They will hope that their money will gain in value a lot more compared to the small amount of gain they will get if they put it in a savings account.
If you are worried about the risk then using a managed fund could be for you. The fund manager will decide where the funds should be invested to make the biggest potential gains and if they are experienced then you should be able to trust them to make the right decision. There will be a charge for this though but you can compare the charges of the different companies as well as their potential gains (usually based on past performance) and then you will be able to decide whether you think they are a good company to go with. You still have to take a risk because you do not know whether past performance will be a good indicator of future performance but it is better than not doing any research at all and just making a risky guess. Hopefully you will make the right choice and will make some gains.