Buying Stocks
I will buy stocks in promising companies with hope that the value of shares will increase with time where I can decide to resell to investors or become a shareholder to earn dividend every financial year. Companies sell shares to people to raise capital for their growth, where investors get a chance to buy those shares (Widodo & Wajdi, 2017). The stocks can give high returns when their value goes up, and therefore as an investor, I will probably make a profit upon selling those shares. However, it is a risky investment since the stock can lose value.
Investing in Bonds
I will consider buying bonds since it is a more stable and risk free investment method compared to buying stocks. It is usually a loan a government where the bond issuer borrows money and pays back with interest. It provides a steady flow of income through interest payments extended to the bondholder. According to Mohanty et al. (2015), the bond issuer sets the interest rate that will either be variable depending on economic conditions or set at a fixed rate. It is also known as coupon rate in financing decisions. Upon expiry of the set period which is the date of maturity of the bond, the issuer will pay back the original loan amount with accrued interest. The paid amount is known as face value of the bond.
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Investing in cash and cash equivalent
I will also decide to invest in cash equivalent methods such as savings accounts, money markets, or certificates of deposits. Savings accounts will consist of cash deposits in fixed accounts with high-interest rates. The risk is quite low, which means the returns could also be minimal. As an investor, I will be guaranteed the interest I earn as well as my capital. I can extend my investment by opening a CDs account, which can provide a higher interest rate. It is an insured savings account that is safer and more conservative than bonds and stocks. It is only withdrawn after a specific time with good interest. Still, I can think of money market as a considerable way of investing since it is more liquid with low risk than other investments but the return is low. As a mutual fund, it focuses on short term debt securities of high quality such as US treasury bills and commercial paper (Schmidt et al., (2016). The money is invested and pays back a portion of income as dividends to the investor.
Discuss one of the (3) ways you feel most confident as a way to invest in your future. Explain your level of confidence.
I would invest in stock as the most preferable venture by buying shares, and other traded securities such as currency swaps and options that will guarantee better returns while minimizing risk. As a stockholder, I will get a chance of owning a portion of the company value and a right to make decisions or vote in the company. The expectation of the profit made is realized by how the market values the asset. Widodo and Wajdi (2017) explain that shares obtain value when they are highly demanded by investors who want to own part of the company after it records profit. Buying shares in different companies distribute the risk of loss in case one fails to gain value or goes out of business.
Of the (3) ways you will invest in your future, discuss the one you perceive might be the most challenging. Then, discuss how you might overcome some of those challenges.
Investing in cash equivalent may be challenging since the rate of return is low compared to other methods of financing. The method cannot beat inflation and, therefore, is not designed for long term investments such as retirement goals. Money markets and savings can depreciate in value when the market conditions are volatile leading to low interest rate returns (Timmerman & Wermers, 2016). Mostly they are not insured against loss of value caused by inflation and other factors. To overcome the challenges, I will broaden the investment options available and consider short term investing options. I will also study the market tread to predict the time value of money and the possible rate of return of any investment option under the cash equivalent.
References
Mohanty, M. S., & Chan, T. (2015). Emerging market local currency bonds: diversification and stability. Emerging Markets Review , 22 , 126-139.
Widodo, S., & Wajdi, M. B. N. (2017). An analysis of decision making in the stock investment. Economic: Journal of Economic and Islamic Law , 8 (2), 122-128.
Schmidt, L., Timmermann, A., & Wermers, R. (2016). Runs on money market mutual funds. American Economic Review , 106 (9), 2625-57.
