To combat this, we have created a series of self-help articles to assist in identifying when not to invest. However, if you take nothing else away from these articles, remember to be realistic about your money and what it can and can't do. If something seems too good to be true, it probably is. Below you will find a summary of our financial self-help articles, with links to each. If you have additional questions or would like to see a topic discussed, let us know by messaging The Investor.
First, let's discuss what an investment is. In its most basic form, an investment is something you put money into, hoping to receive a return or increase at a later date. Good investments return more money than you invested, and bad investments lose some or all of what you paid in (often called 'principle'). Generally speaking, investments can be classified according to their risk level, being either low, moderate, or high risk.
Low-risk investments carry little risk but do not have high returns. An excellent example of this is a savings account. In this case, you make a short or long-term deposit with a bank, and the bank pays you interest on your money. The risk to you of the bank taking your deposit is generally very low to nonexistent. However, the interest rates paid by banks are usually less than the rate of inflation for most currencies, which results in a net loss over time. We explain this in more detail in our article on when to save and when to invest.
Moderate-risk investments carry greater risk and no guarantees, but they offer higher returns than low-risk investments. An example would be publicly traded stock in a major company or a well-known international brand like Mercedes Benz Group ADR. In the case of stocks, their value increases as the value of the company increases, and some pay dividends quarterly or yearly. Over time, the value of a good stock will typically be greater than the rate of inflation or the interest a bank will pay on deposited funds. However, all investments carry risk. Sometimes a stock will not increase in value, and it may even decrease over time. Why this happens is discussed in our article on understanding stocks.
High-risk investments carry a great deal of risk but can offer very high returns. Examples of high-risk investments are:
- Penny stocks.
- Stock in a private company.
- An initial public offering (IPO) from a relatively unknown company.
You should only consider these investments if you're an experienced investor or financially able to accept the high risk of losing your entire investment. Several articles cover these topics, including an explanation of penny stocks, how to evaluate an IPO, and the difference between private and public stocks.
Now that you have an overview of investments and what they are, let's discuss the dark side of investing in the next article...
