The offers of tools, professionals, and investing strategies are endless online. Investors must gather information about the different financial instrument types to define a great investment strategy.
Defining a plan
Investors, to avoid unpleasant surprises, establish a strategy before making investments. They analyze the financial market in advance and make assessments of the risk/reward ratio.
Many rely on professionals in the financial sector, for example, on wealth management companies like Moneyfarm, who can structure an investment plan tailored to each investor’s particular needs, taking into account their degree of risk appetite.
The professionals help the investors define the goals to achieve, considering why the investment is required.
Some investors decide to invest in having an additional income to add to their family portfolio, for example, by purchasing properties to rent out or by buying shares in companies to participate in the distribution of profits. In contrast, others aim to increase the value of their investment through high-risk financial transactions.
Every kind of investment can sometimes bring significant gains but also substantial losses, as there are no risk-free investments. Knowing the types of assets and their characteristics makes investors more aware when choosing a financial plan.
Each financial instrument has its level of risk. Before making a choice, it is essential to understand the nature and level of risk fully.
Let’s start with the definitions: risk is the probability of obtaining a lower return than expected. The degree to which an investment’s value fluctuates is called “volatility.”
All investments have a risky component, and often, the greater the risk and the greater the profitability of that instrument; therefore, to make a good evaluation, it is necessary to make a careful analysis that considers price and volatility.
Thanks to the help of professionals, it will be possible to evaluate the percentage of risk through mathematical operations using financial indicators collected over time.
When an investor decides to invest money, i.e., from their monthly savings, they will have to decide on the time frame in which they will be willing to give up that liquidity, which will be spent to purchase a particular financial product.
Those who opt for short-term investments usually prefer low-risk financial products as it would be challenging to regain losses in the short term. In contrast, long-term-oriented investments often have a higher risk rate but higher profitability. In a long time, market fluctuations tend to be more stable than in the shorter term.
Types of investments
According to the investor profile analysis and considering the variables we mentioned earlier, the professional structures a portfolio that includes specific financial products by choosing among the different opportunities the financial market offers.
Shares of companies listed on financial markets and bonds are among the most popular products known by the most significant number of investors. Still, there are also innovative financial instruments such as ETFs, pension plans, and derivative contracts such as options and forwards.