Taking Risks: Are you up for it?

Finance and Investment

Finance is the management of money and other assets by individuals, private institutions, and public entities such as governments and large companies. It is generally divided into three subcategories: personal finance, public finance, and corporate finance. Personal finance, as its name suggests, is the management of money by individuals. It generally centers on securing the individual’s financial future under the unstable economy and unanticipated events. Alternatively, public finance focuses on how public entities manage their money. Among the primary concerns of public finance are the budgeting process of public entities, their required expenditure and sources of revenue, and debt issuance for public works projects. Lastly, corporate finance primarily deals with providing funds to a corporation’s activities and analyzing a company’s profitability and risks while attempting to maximize its assets and stock value.

In finance, investment is the act of putting money into something with the prospect that it will produce income or be sold at a higher price over time. Investment typically refers to a long-term outlook and generally involves some sort of risk. It can take several forms with varying amount of return and degree of risks. For instance, government bonds involve much lower risk than international stocks but the latter results to higher rewards.

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Stocks

In order to raise money for different reasons such as paying off debt, financing expansion, and providing operating capital, businesses typically sell stock shares. Once an investor purchases a share of stock, he gets a share of ownership in the company and as a result will share in a portion of any earnings and growth of the company. In some cases, dividends from the company’s profit are paid to shareholders.

The primary reason people invest in stocks is to seek capital appreciation and growth. In general, stocks present a higher average annual rate of return in a long term as compared to other investments such as bonds and cash alternatives. Stocks, however, also characteristically presents a higher risk than the two.

Bonds

Bonds are traded in large volumes daily. However, since it generally gives lower return than other investments it is often underestimated. As compared to more popular investments such as stocks, real estate, and precious metals though, bonds presents considerably less risk. When an investor purchases a bond, he’s effectively loaning money to the bond issuer. Bond issuers are usually government agencies or private corporations in need of money to fund a program or finance a venture. The investor will then be paid with interest payments at regular intervals, typically according to a fixed annual rate.

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