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Making an investment can be the key for a person or company to achieve a significant economic gain in a relatively short time.
As in any activity, you must first weigh the advantages and disadvantages of investing money and analyze the market very well to make the best decision.
Defining the advantages and disadvantages of investing money requires talking about many possibilities, but what is certain is that by doing so your money will work for you, that is, that you can multiply the initial figure in a relatively comfortable time, which is not It would be possible if you keep it in a safe or in a bank where at the most you will earn a small percentage in monthly interest.
Due to inflation and the rising cost of living, investing is increasingly a necessity and is a very useful tool to guarantee better use of the money obtained through work, inheritance or other legal means.
Let’s review what are the advantages and disadvantages of investing money and what you could gain or lose by doing so.
Why do I need to invest the money?
Due to the great changes in labour matters, the sudden creation and disappearance of companies due to market dynamics and many other reasons, it is very rare for an individual to spend his entire life working in a single company and retire to live from his pension.
As a rule, the vast majority of people since the end of the 20th century have worked in more than one place, often dedicating themselves to very different functions on each occasion.
Dismissals in the public sector due to government budget cuts or in the private sector due to low profitability in projects causes people to continuously worry about how they can continue raising money for their pension, without also counting how to pay regular debts in their homes.
By investing your money intelligently, you can make a profit that you can then invest again or save for the future.
What can I invest my money in?
Due to the complexity of the global economic system, with public and private companies executing projects of all kinds in every imaginable area, there are many different types of investments in which you can put your money to grow.
For example, you can invest in goods and objects that, due to their history, rarity or technological peculiarity, are expected to increase in value as time passes.
Another form of investment is the purchase of a residential or commercial property, which, in addition to gaining value over time, can also give profits for rentals and other uses.
This is coupled with the possibility of investing your money in the purchase of securities or financial assets such as bonds or shares of a company in the stock market.
If you invest in shares of a company, you are acquiring security whose value is equivalent to one of the parts in which the company’s capital has been divided.
If you buy enough shares, you can even become part of its shareholder’s meeting and increase the benefits you will receive for the company’s profits at the end of a certain fiscal period.
How can I invest my money?
If you have an amount of money available and do not want to limit yourself to having it saved in a bank, the fastest thing is to invest it directly in the purchase of objects or real estate. But refrain from investing in things that are devalued, such as vehicles, electronic equipment and other goods that may become obsolete and lose value in a short time.
In any case, you should always research the markets, analyze the valuations and make your own decisions about where to place your money.
If you do not have time for this, or do not consider yourself sufficiently skilled in the subject, you can leave this type of decision to intermediaries or investment agents, who are professionals with experience in the field that in exchange for a commission are dedicated to investing with the money from clients or groups of clients, seeking maximum profitability.
For example, you can let your preferred bank or an investment club you have joined invest your money in projects or assets that they consider potentially economically beneficial.
This includes buying shares of a certain company to participations in residential or commercial projects that are expected to give good dividends.
What these intermediaries do is use the money of all the clients and then distribute the profits or benefits according to the amount that each one contributed.
However, this criterion of distribution of responsibilities also applies when there are losses, each client must assume the part of debt or loss that corresponds to a failed investment or that did not give good results.
What are the advantages of making an investment?
- Access to the Instrument
- Related Services in CMF + near
The main advantage of investing in stocks ?Is it possible to have access to profitability ?generated by a company proportional to the resources invested. In other words, with a modest amount of resources you can access investment in large companies.
One of the characteristics of the shares is the ease and speed with which they can be sold in the capital market at a fair price. This attribute is called liquidity.
Liquidity is the extent to which a security, in this case the shares, can be converted into money and can be observed through some indicators such as:
- The amounts that are traded in that particular action.
- The stock presence of the security, which is the number of days in which transactions of that action are recorded in relation to the total working days of the period and,
- The number of shares that are traded in relation to the total number of outstanding shares (index called stock rotation). Thus, actions that have high traded amounts, stock presence and turnover will be more liquid than others that have lower levels in these indicators.
Each share title offers investors a combination of expected return and risk, associated with the economic sector in which the company’s activities are carried out and the company’s own characteristics.
The future profitability of a share is uncertain, therefore, the decision to buy or hold the security is made based on the expected return.
There is a wide range of shares on the market, which allows for more than one investment alternative for each of the different types of investors.
Investors can form an investment portfolio with different shares, in order to compensate for the volatilities of each other.
Adequate diversification is not only achieved by choosing different actions of the same risk class (same industry), but also several actions of different risk classes (countries, sectors and investment terms).
The investment portfolios Diversified are more efficient than investment in a single action, that is, they allow to increase the expected return without necessarily increasing the risk.
Access to the Instrument
The transaction of a stock exchange? Can it be done through a stockbroker.
This type of intermediary is regulated by the Securities Market Law and by the CMF regulations.
The operation of open corporations ?It is regulated by the Corporations Law and the Securities Market Law and, in addition, they are supervised by the Financial Market Commission.
The return of a share comes from the business of the company, the dividends received plus (less) capital gains (losses) that generate price differences between the time of purchase and sale.
Sometimes, price changes are the main component of the return obtained from an investment in shares. As noted, these returns are variable, said variability being a measure of the risk associated with investment in shares.
On the other hand, the dividends that the shareholders receive depend on the results of the issuing company of the shares they own and to the extent that they are positive and permanent, the shareholder may have a stable flow over time.
Fluctuations in the price of a share are mainly caused by changes in expectations regarding the future profits of the company, so the prices of the shares are essentially variable.
In addition, the company’s profit expectations depend on factors that are not directly related to the economic activity developed by the company, such as the general economic situation of the country and the business environment.
They can be summarized in several ways, but the main one to take into account is that the money you invest at the beginning will be multiplied at the end of the investment.
For example, if an investment in capital markets you can make profits that with daily work, savings or with other financial instruments you would never get.
In this case, not only you benefit, but also the company whose values are putting your money, which can use the new resources you have injected to acquire new equipment or complete a project in which you have high expectations of profit.
Investing in areas such as the stock market offers you the possibility of putting your money in an infinite variety of companies and if you distribute this investment among several you can mitigate any risk of loss if any of them does not achieve the expected results.
What disadvantages does an investment have?
The biggest disadvantage of investing is that there is always the risk of losing money if things do not go as expected.
For example, if you invest in a rare collector’s item, the value may fall depending on its popularity and its availability in the market. Here the law of supply and demand acts on the variation of the value of this article.
On the other hand, share prices can fluctuate for many reasons, from the evolution of competing projects to the gain or loss of market confidence.
Even a defect detected in a product line can generate market rejection and affect the company in whose actions you decided to invest your money, reducing its value.
The financial crisis that affected the US economy in 2008 had an impact on the price of homes, traditionally the safest investment, and showed that not even these types of activities are shielded against failure.
Depending on the type of investment made, it may take time for the profits to reach your hands, especially when it comes to long-term projects.
Another factor to consider is that when investing in stocks or financial instruments you may have to pay commissions and costs that will reduce part of your final earnings and that are not refundable.
A particular political or economic situation may increase market risk , such as changes in the laws that regulate the securities and goods markets. This makes it harder to make a profit, so you need to be very clear about the right time to invest or even if it is better to wait.
Another existing risk when investing is that the investment agent to whom you gave your money does not fulfil its obligation.
Caution before investing
You should never see investment as if it were a bet. Always try to investigate the market where you are going to invest deeply before deciding to commit your money.
Although there is always the possibility that market vagaries may result in a loss, the most reasonable expectations are that in most cases you will have a profit that will justify any risk.