subject: However Complex Invest With Full Understanding Always [print this page] Investment types range from simple to the complex. But whatever the case, you must understand how your investment will work for and against you - or suffer the consequences. Don't let complex investments lure you into investing without proper understanding.
To get the best return for the least risk and cost to you, answer these 5 basic questions about any investment you're considering:
1. How does this investment generate value or income for me?
2. What are the risks involved?
3. What are all the costs involved?
4. How do I get out of it?
5. Does this particular investment suit my circumstance?
Knowing the answers to these questions before investing will assure that you can sleep better and make a better choice among alternative investments.
*Simple investments:
A simple, straight-forward investment example of understanding your purchase investment might be a stock or a bond you want to buy. For a stock, you receive a return either by its increased share value or by its dividend payments. Your satisfaction about its risk and reward comes from understanding the nature of the company, its competition, and how the economy can affect it. This takes some homework on your part, though.
The cost is simply the purchase of the stock plus broker's fees both at purchase and selling. You can hold the shares at no cost and sell them on the market whenever you want. Direct purchase of stocks would suit your circumstance if you have sufficient money to buy in lots of 100 and perhaps buy an array of different stocks to diversify your risk.
*The effect of investment complexity:
More complex investments remove you further from the underlying security(ies) involved. They make you dependent on those managing the investment. In this case your return and risk - though dependent on the underlying securities - also depend on management capability and its costs to you. These include management operating fees and buy/sell charges to you. Also, liquidity may also be restricted somewhat or severely.
Pooled investments such as open-ended and closed-ended funds and unit trusts represent this next level of complexity. These are suited to investors who want to rely on management's security choices and who like the diversity offered by the fund's large and diverse portfolio. But, now your homework shifts to evaluating all the costs and past performance associated with that fund's management.
When dealing with even more complex-structured investments, it's easy to get confused about just how money is generated for you and what risks are involved. The actual risks associated with all the various hedge-type funds connected with the prime mortgage debacle were obscured even to the experts. Other investment areas are fraught with a myriad of fees and costs that can easily eat up good performance in underlying securities.
It's wise to stay clear of investments that are confusing to you, offer risk that is unclear, and are fraught with many fees.
