Important Things to Consider Before Making An Investment Decision
Investing is the act of assigning resources, usually money, into assets with the hope of earning profits. People choose investments according to their personal needs, goals and interests. There are factors which need to be considered before making investment decisions. These ensure that your money is put to its best use, and that it yields the best returns with a minimal likelihood of incurring loss.
In finance, risk refers to the possibility of losing money due to unforeseen circumstances. The higher the potential return, the higher the potential risk of losing money. For example, investing in the financial market has a higher risk than investing in a Savings account, but it also promises higher returns.
There is a degree of risk in any investment, however understanding how much risk you are willing to take will also guide you in the direction of the best investment strategy for your personal situation.
Return on Investment (ROI)
Return on investment is the benefit that the investor gains after deducting the cost of the investment. It can be in the form of interest, dividends or capital appreciation (an increase in the value of assets).
Assets tend to have certain returns; accordingly, each organization should establish a target return rate and determine whether it is viable or not. Since this process can be pretty complicated, it is advisable to use the help of professionals. Even the safest investments come with some level of risk. As such, it is crucial to set realistic expectations for the potential returns of your investment.
Investment Horizon (Period of Investment)
An investment horizon refers to the length of time that an investor is willing to hold the portfolio which can influence the return on investment.
The investment can be short, medium or long term. Long-term investments must be held for more than a year, while short-term investments are held for one year or less. Long-term investments generally yield higher returns than short-term investments. The investment period is usually dependent on the personal needs of the investor and generally commensurate with the amount of risk that an investor is willing to undertake.
