Reasons for Savings & Investment
People can choose to spend or save (invest) from their income. People can use their saving to invest, so that their value will increase.
- The more a person spends, the less savings he or she will have.
- The less a person spends, the more savings he or she will have.
Shares
- Potential capital gains
- Potential income as dividends
- Lower tax rates on long-term capital gains
Risk and Return
Reasons for investing:
- Future major purchases (eg. property, car)
- Personal Commitments (eg. wedding, having children)
- Extra income from investment
- Retirement (especially since nowadays people can live longer)
Income
- Regular income: rent, dividend, coupon payments. These are being paid to the owners at a regular interval (eg. monthly, half-yearly)
- Capital Gains: this is the profit earn when selling the investment asset. This is calculated by subtracting from the purchasing price. Logically, you buy low and sell high.
Rate of return
- Rate of return (ROR) is the profit earned as a % of the original investment.
- If it is a loss, the ROR would be negative.
- Of course, the higher the ROR, the better.
- The basic rule of investment is: the higher the rate of return, the higher the risk of losing your money. The more it fluctuates, the more the chance for significant gain, but so is the probability of loss as well.
How to avoid investing failure
Wise investors spread out their investment (some are risky, some are safe) by having a wide range of investments or a balanced portfolio. This is called diversification.
Don’t put all your eggs in one basket.
Different types
- Term deposits: deposit a fixed amount into a financial institutions for a specific period without any cash withdraw. The rates are better than a normal saving account.
- Superannuation: employers have to pay an additional 11.5% of your Wages into a Superannuation fund which is invested. When you have retired, then you can access the fund.
- Shares (or Equities): partial ownership of a company. When the company is making a profit, investors receive a dividend.