Investingin the Future
Investingin the Future
Inorder to understand the role of investing in personal financialplanning, it is important to understand the concept personal finance.Personal finance is defined as the financial management that a personis necessitated to do in order to get, budget, spend, and save moneyover a period of time (Koh, 2012). This is done while with regards todifferent financial risks as well as future life occurrences. Whiledoing financial planning for personal finances, persons put intoconsideration the appropriateness of their needs on investmentincluding mutual funds, stock market and bonds (Koh, 2012). Planningones financial future is deemed to be among the most essential thingsan individual can do in his or her life. For individuals to besuccessful in their life, they need to plan every aspect be it aweekend out or major projects to be undertaken in future.
Doingpersonal financial planning is a fundamental aspect considering thatis assist in securing a persons future. Individuals do not need toworry regarding having finances for unexpected expenses for example,emergency hospital visits. This is based on the reason that personalfinancial planning entails saving a little money from ones budgetwhich acts as security in such unforeseen events (Koh, 2012). Unlikethose who live on paycheck to paycheck, it provides peace and afeeling of security in one’s live. It is worth noting that whenindividuals decide to plan their financial future, there are a numberof diverse features which should be taken into consideration. Forinstance, it is vital to balance the finances while considering bothshort-term and long term goals.
Whiledoing personal financial planning, it is fundamental to stick to aparticular budget. It assists in increasing individuals’ knowledgeregarding their finances. It also helps in increasing the habit ofsaving as people can be able to squeeze their savings from theirmonthly salary. Planning personal finances brings about the eventualgoal of being comfortable during retirement years. It is believed tobe the most significant reason for planning the future especiallywith the current economic instability. In a nutshell, the generalrole of investing in personal financial planning entails finding waysto amplify net worth at a stable rate. The goal can only be achievedby saving finances, allowing for the appreciation of assets, as wellas paying off debt.
Thereare various types of stock which include common stock, preferredstocks, as well as convertible preferred stock. These stocks havedifferent attributes which an investor should put into considerationprior to investing. For Sam’s financial profile, the attributesdiscussed herein for the three kinds of stocks would be a goodchoice.
Tostart with, in common stock, investors have voting rights which theycan exercise in corporate decision making. Individuals obtain companyownership by buying common shares which are rewarded by earningdividends. These dividends are variable and are not guaranteed. Boardmembers who are elected by the investors have a responsibility ofoverseeing the key decisions which are formulated by the management.Research has shown that common stock results in capital growth whichin return yields high returns (Pozen & Hamacher, 2011). Suchreturns have been shown to be high as compared to any other kind ofinvestment. However, common stock are the most risky to invest in,therefore these high returns come at a particular cost.
Unlikecommon stock, preferred stock lack voting rights. However, it islawfully permitted to obtain a particular degree of dividend paymentprior to issuing any dividend to the rest of the shareholders. Itsignifies a certain level of company ownership although it does nothave equal voting right, but this depends with the company (Pozen &Hamacher, 2011). Investors own preferred shares which guarantee thema fixed dividend eternally. Another attribute of preferred stock isthat in case of liquidation, investors with preferred shares receivedividends first. It is also callable signifying that the shares canbe purchased from the shareholders by the company at any time. Theshareholders in turn earn a premium.
Lastlyis the convertible preferred stock. In comprises of an option for theshareholder who have the right to change their preferred shares tocommon shares. This is generally carried out following a determineddate. Such shares are referred to as convertible preferred shares.
Advantagesof Investing in Bonds
They are extremely flexible
Ability for the investors to target particular investments which meet their investment style
Allows investors to possess the most excellent bonds in the market
Investors are able to evade high investment cost ratios which are linked with other investments vehicles such as mutual funds
Allows for fees avoidance which allows in boosting returns
Disadvantagesof Investing in Bonds
Knowledge of forming a correctly diversified portfolio is required
Over diversification and under diversification which results in poor performance of portfolio
Advantagesof Investing in Stocks
Results to high returns, with yearly gains of over 100 percent in most instance
Investors who buy stocks get an opportunity of taking part in the company growth. This is through shareholding where the shareholders are entitled to dividends from the company’s profits.
Stocks are liquid implying that they have the capacity of being sold or purchased at a reasonable price.
Stocks are highly beneficial as shown by past records although they have the capacity to rise and fall at any time
Stock owners earn capital gains and dividends payments
Disadvantagesof Investing in Stocks
Stocks are volatile investment. This implies that their value may significantly fall or rise but this depends on the condition of the market.
Stock owners are the last individuals to receive company profits. This is so because the company first pays its staffs creditors, suppliers and the remaining is divided amongst the shareholders depending with their shareholding capability.
Although the shareholders own the company, they lack full ownership and rights of the company.
Advantagesof Mutual Funds
Advanced portfolio management
Risk Reduction (Safety) due to diversification
Convenience as well as fair pricing
Disadvantagesof Mutual Funds
Fees: shareholder fees and annual fund-operating fees.
Reduced amount of control over timing of acknowledgment of gains
Less expected income
Lack of opportunity to customize
They lack liquidity
High expense ratios as well as sales charges
Poor trade execution
Mutualfunds are combined investment scheme in which various investors areable to pool their finances together with the aim of purchasingsecurities. They are generally applied to shared investment vehicleswhich are controlled and purchased by the general public. Duringclassification of mutual funds, principal investments are used. Thereare various classifications of mutual funds which include fixedincome funds, money market funds, hybrid funds, and equity funds(Appel, 2010).
Mutualfunds are extremely popular and this has been enabled by theirvarious features including diversification, professional management,simplicity of purchase, as well as redemption and daily pricing(Appel, 2010). These are major benefits to the investors and they arethe ones which make mutual funds good investment vehicles as comparedto stocks or bonds. In a mutual fund, investors pay the costs of thefund and this lessens the performance and the gains of the fund. Suchexpenses encompass loads or sales commission.
Inthe contemporary time, mutual funds play a significant responsibilityin household finances. In fact, they are most notable in retirementplanning. Investors who have low investment capital are encouraged toinvest in mutual funds as they act as a practical alternative. Inthis case, mutual funds may be the best investment vehicle for Sam.To start with, he has a low investment capital of $150 which insteadof putting in a savings account, could be invested in mutual funds.This would also increase his interest rate from less than one percentto higher depending with the amount invested. Considering that heonly has 20 years to reach his retirement age, mutual funds would bethe best for his retirement planning. He could have the opportunityto reinvest his dividends besides obtaining fair pricing for hisfunds. By doing so, Sam would be able to see his children who arestill at their tender years finishing their college years without anyproblems. Mutual funds would offer guarantee for future financialsecurity.
Appel,M. (2010). Higherreturns from safe investments: Using bonds, stocks, and options togenerate lifetime income.New York: FT Press.
Koh,B. (2012). Personalfinancial planning,(4th ed). New York: FT Press.
Pozen,R. & Hamacher, T. (2011). Thefund industry: How your money is managed. NewYork: John Wiley & Sons