BY FAZAAD BACCHUS
There is the simple truth that if you do not understand something, you are more inclined to stay away from it and for that reason, many do not venture into Financial Markets. Let us examine the construct of one and determine whether or not it is right for you. The first thing to understand about Finance or the definition of it is “the economics of allocating resources across time”.
Your money is one of your most important resources and needs to be carefully spent, heavily guarded and wisely invested. You are part of a financial market whether you are aware or not, it happens when you enter into a mortgage agreement, open a savings account, start your child’s education savings plan or when you begin putting away for your retirement. In all of these instances you are either a borrower or a lender and thus participating in financial markets. How come I’m a lender you ask? Well whenever you deposit money in a financial institution, you are in fact lending money to the intuition.
They will invest it and for the risk you are taking they should repay you in the form of interest plus your capital of course. Borrowers pay interest and lenders earns interest, if the bank thinks that you are a risky borrower they will charge you more interest. Therefore in finance there is a rule which is followed: Low Risk = Low Return and High Risk = Possibly High Return. There is no guarantee that a high risk investment will provide a high return as many such investments can suffer a default risk, failing altogether.
Back to allocating your resources. If you had $1,000 today and decided to spend it one year in the future should you not be rewarded in some way for delaying your spending? But then again what will your $1,000 be worth in one year’s time. Let’s say you earned 2% interest, you now have $1,020 which is more than the original sum. Now what is the cost of the item you wanted to purchase which was valued at $1,000 a year ago? If that item’s cost is now greater than $1,020 you have lost purchasing power and are now in a dilemma. Your money had a better present value than does its future value.
You have little or no control over how markets will swing, how cost of living rises but to be able to trump above it you can use financial markets to your advantage. Investments are more desirable when their Future value can buy you more than their Present value, but how is that possible? Well, hypothetically, let say you took all your money and bought a small company and it grew, you may realize a handsome profit many years later should you sell, that’s utilizing financial markets.
However, not too many have such an opportunity before them, so they have to buy a piece of a company. In short words, they buy the common stock of a company and hope that the company does well. This investment should pay dividends and perhaps the value of the stock will increase, thus creating capital gain. But which company’s stock should I buy and in what sector….oil and gas, pharmaceuticals, financials or commodities? Or should I buy a few small companies and spread the money in all the sectors….should I buy locally or overseas….oh I really don’t know anymore.
It’s at this stage most people do nothing as the fear of the unknown keeps them away from what they don’t understand. At this stage you ought not to go at it alone, consult a qualified Financial Advisor who will guide you on the risk you can afford to take and help you navigate through the best investment choices so that your wealth tomorrow is greater than your wealth today.
Feel free to drop me a line on any finance queries you may have.
