Here are some tips in investing.
Investing is a key part of economics and business. People invest in businesses and companies in order to make money. Most people also know that investing involves risk and there is a relationship between risk and return. The bigger the risk you take the bigger your potential return and loss are. Some people are afraid to take huge risks and use different principles such as asset allocation, diversification and dollar cost averaging to minimize risk.
One principle people apply when investing is asset allocation. Asset allocation is when you invest in several things such as stock, gold, and real estate. The idea is to invest in several things and not have all your money in “one basket.” By doing so you do not have all you money in one place and take a bigger risk of losing your entire investment. Asset Allocation is one principle investors follow while investing in business and companies.
Investors also lower risks by using the principle of diversification. Like its meaning diversification involves diversifying the types of stocks you buy and in which companies you buy them from. Some people may find it difficult to actually diversify their investments and will use a mutual fund to diversify for them. A mutual fund is a company that pools in money from many investors and uses the money to invest in different types of business and companies. This way you own a small portion of an investment in diverse things. Diversifying your assets helps reduce your risks when investing.
Dollar Cost Averaging is another strategy investors use to minimize risk. Dollar Cost Averaging means that you buy stock on a regular basis regardless of how the stock is doing. By doing this you do not put all your money into the stock in one shot and lose all your money. People also should invest in things you know. For example if you know that people love shopping at Wal-Mart then you should invest in Wal-Mart. Also people should not always buy from blue chip companies because this can lead to a greater risk. Dollar Cost averaging helps decreases the chance of losing all your money in an investment.
As we can see investing will always involve risk and investors will have to find ways to minimize the risks. By following the principles of asset allocation, diversification, and dollar cost averaging people can lessen the risk and possible receive a higher return. Risk and return have a direct relationship in investing.
Published in: Personal Finance