How Can You Invest Your Money?

Has the investing world, or your investment advisor, ever got your head spinning? With all of the different financial products out there it's easy to be overwhelmed and confused about what products and strategies are right for you, your family and your money. This article explores the various financial instruments available for investment and will hopefully give you insight into where the best place is to put your money.

Debt Instruments

Usually when you hear about debt, the natural reaction is to curl up in a ball or run away screaming. Don't do it this time. This time debt instruments are when you're lending the money out to others and they are paying you the interest. But we're not talking about lending money to your uncle Jerry. Governments and large corporations issue bonds which are a type of debt instrument that you can purchase and will pay you interest while you hold it. Other similar types of debt instruments you can invest in are debentures, mortgages, and treasury bills. These are also referred to as fixed-income securities as the income you receive from them is typically fixed at a certain dollar or percentage amount.
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Equity Instruments

Equity instruments are more typically called stocks or shares, since you are actually purchasing a share of the company you are buying. Unlike a debt instrument, you aren't loaning any money so there is nothing owed to you however you as part owner get to participate in any growth and profit that occurs within the company.
There are two main types of equity instruments; common shares and preferred shares. Common shares allowed the owner to participate in any profits of the company through capital appreciation and through dividends if they are paid out. Common shareholders also have the right to vote on company decisions tabled at the annual shareholders meeting. Preferred shareholders get advanced access to profits through dividends before any of the common shareholders are paid. Though this is advantageous for a safer dividend payment, most preferred shares do not come with any voting rights.
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Investment Funds

An investment fund is simply a firm that handles investments for a group of people under one investment account. The common fund is a mutual fund. The money gathered from all clients is pooled into one account that is used to purchase equities in most cases although so funds have a mix of equities, bonds, and cash in varying amounts. Each clients gets a percentage return based on the performance of the fund.

Often times people buy in to mutual funds when they themselves don't have the time to invest on their own, so they allow professional managers to invest for them. Another big advantage to investment funds is that they provide easy diversification without having to purchase multiple products. Exchange Traded Funds (ETFs) have been growing in popularity and are a way to have the advantages of diversification without the management expense of mutual funds.

Derivative Investments

Derivatives are not normally financial instruments used by everyday investors. They are typically reserved for sophisticated investors whose business is investing. Derivatives are financial instruments that are derived from a base instrument like a stock but don't necessarily involve the trade of the base instrument itself.

The most common derivative product is an option. Options give the holder the right, but not the obligation to, purchase a stock at a given price (known as the strike price). Products such as options and futures allow the investor to profit, or protect their investments without having to outlay as money as would be required to buy the underlying product itself since the options are generally much lower in cost.

There are numerous trading strategies related to options and futures trading but can become rather cumbersome to manage and require a lot of careful attention to your investment and might add significant risk.

Where Will It All Go?

Hopefully this will be the question you'll be asking yourself. The quick answer is to not put all your eggs in one basket, but to have a smattering of debt instruments mixed in with equity investments. Choosing which one is a whole other subject, but an endless fascinating one. If you've found that you don't have the time to dive deeper into equity investments or debt instruments then perhaps going with a mutual fund might be your best answer. They will do the heavy lifting for you and hopefully make you as much profit as you would have on your own. For the brave amongst you, options trading could allow you to have very large profits on very small outlays of money, although you take a great risk in the process.