World of investing is big, diverse and exciting!
You have to learn how to save your money and invest for very simple reason – achieving financial freedom. Financial freedom means that you have enough money not only to cover costs of your basic needs, such as food, community bills, insurance and others, but also to do whatever you choose to at any given stage of your life.
Knowledge gives confidence. So, be ready to learn rules and methods how to deal with your money intelligently.
Below we briefly mention several major concepts every investor should be aware of from the very beginning.
Financial goals make investing meaningful. Take time and think a bit about your life in the long run.
What you will do and where and how you live?
What kind of expenses are ahead of you? How prepared are you to cover them?
What part of your earnings you could put aside for future use?
When you have an idea how much you would like to save, the next question arises: how to invest money? There are numerous ways to do so depending on your risk tolerance. Moreover, it would be smart to do it in cost efficient and tax efficient ways.
Circumstances of each of us are different and the best person to find out and decide why, what and how to invest is YOU. So, start digging into this area, learn, read books, consult with advisers, make conclusions and move on. Over time you will become good on it.
There is big variety of financial products nowadays, including deposits, bonds, stocks, funds, ETFs, REITs and many others, sometimes very sophisticated products.
You may find definitions of main financial products in Glossary (link)
They bear different degree of risks. Generally riskier products have higher returns potential.
For example, equities are more volatile than bonds. At the same time over long term equities tend to provide with higher rates of return than bonds.
As history shows, economy moves in cycles. Economic expansion reaches peak and then turns into contraction. Then it starts all over again. Such waves have a length of anything from several months to several years. They are difficult to predict and are determined by measuring economic indicators such as Gross Domestic Product, Inflation, Unemployment, Interest Rates and others.
Stock market experiences waves as well. Its ups and downs usually precede those of economy.
Economic cycles are important since they lead to sector rotations and have effect on stock prices.
Sectors of economy
According to CSIC Classification, all the stocks are classified into the following 10 basic industries.
- Non-energy Minerals – keisti!!!!!!!
- Producer Manufactoring
- Electronic Technology
- Consumer Durables
- Energy Minerals
- Process Industries
- Health Technology
- Consumer Non-durables
- Industrial Services
- Commercial/Distrib. Services
- Technology/Health Services
- Consumer Services
- Retail Trade
On each stage of economic development performance of different industries is different. If you learn to adjust your investment portfolio to the state of economy, you can have better performance. For example, in the early stage of economic recovery such sectors as technology, consumer services and financial services can have good opportunities whereas at the peak of economic growth basic materials and telecoms can be better choice. In fact, this means that each sector of economy has its own business cycle with it growth, maturity and decline periods.
However, business cycles are very difficult to predict. So, cautious approach to sector allocation is advised with higher diversification amongst sectors.
Company’s life cycle
Company experiences the following stages over its life time.
- Start Up
At this stage company develops product or service and starts its marketing and selling. Company balances to meet customer expectations and keep at the same time acceptable level of profitability. Customer base is gradually established. Company is small and business risks are high.
Customer base is gradually established. Business model is further developed to adapt to market conditions and prepare for business expansion. Company grows to medium sized. Revenue grows double digit percentage.
Market share increases, revenue and cash flow grow fast.
Company becomes large.
Company is one of the leaders within its industry.
Annual revenue growth slows to single digit percentage.
For some reasons company is not able to support growth. Revenue declines. It develops exit strategy or looks for new opportunities to start business expansion again.
Usually companies start to pay dividends at the expansion and maturity stages. So, majority of companies dividend investors consider are large and medium. Such companies do not grow as fast as small ones, have more stable business model and are more predictable in terms of performance.