Before you can make a decision on how to invest 400 dollars or any amount of funds, it is extremely important to understand the different investment types available. There are various options available, all with different levels of risk versus return. Understanding the fundamental concepts and analysing the risk/reward trade-off is the first step to generating an investment portfolio balanced to meet your needs.
Some of the major types of investment fall into cash, equities (stocks), debt securities, derivatives, mutual funds, commodities and real estate.
Cash investments include savings accounts with financial institution, treasury bills and certificates of deposit. This type of investments generally pays a low rate of interest and typically low in risk. The only time they are risky investments in periods of inflation.
Buying equities (stocks) makes you a part-owner of the business and entitles you to a share of the profits generated by the company. Stocks are more volatile and therefore riskier than bonds. Equities also have varying levels of risk and return based on the particular company you invest in. For example companies known as “blue-chip” are regarded as lower risk, but also lower return than smaller capital companies.
Debt security investments provide returns in the form of fixed periodic payments and potential capital increase at the end of the investment. It is considered a safer and lower risk investment tool than equities; although the returns are generally lower than other securities.
Derivatives are contracts (financial) which are derived from the value of assets on which they are based. Derivatives can be in the form of futures, options and swaps. They are used to lower the risk of loss resulting through hedging. Hedging protects against the fluctuations in the value of the underlying assets.
Mutual funds are a collection of stocks and bonds. It encompasses the payment to a professional manager, whom selects specific securities on your behalf. The biggest advantage of this investment is that you do not have to be involved in monitoring the investment; the professional manager will select and monitor the investments and action changes which match your desired risk and reward profile. This does assume that your fund manager is experienced and holds the correct credentials.
Commodities are another major investment type. The typical commodities traded on the market are agricultural and industrial commodities. These items must be in a basic, raw and unprocessed state. High risk and returns are associated with trading commodities; however trading in commodity futures requires high levels of knowledge and deep analysis into the underlying commodity.
Finally there are investments into Real Estate. This type of investment is a long term one, with returns being gained either through capital growth or rental income. Real Estate can take the form of residential or commercial properties. Entry into Real Estate is the biggest hurdle with fees, deposit etc. With only a few hundred dollars to work with, direct entry into this market will be difficult without government grants which are offered in some countries and states.
When making your investment decisions you will not only need to consider the risk verses return profile. Two other important factors are the length of the investment and how liquid the funds will be whilst in the investment. Liquidity refers to the ease at which funds can be transferred out of an investment, for example if you may need the funds for another purpose at any point in time a cash investment like a savings account maybe the most appropriate investment.
With all of these options, investing your funds the right way is a difficult task and even if it is $400, $4000 or $4 million, expert advice from a financial planner or accountant is often wise way to go.
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