An investment is made because it obliges some objective for an investor. Your investment objectives may differ in accordance with your life stage and risk profile. Every investor invests with a precise objective in mind and each investment has its own exclusive set of benefits and risks.
These investment objectives are significant because certain investments and strategies work for one objective, but may produce disgraceful outcomes for another objective. It is quite likely you will use several of these investment objectives concurrently to achieve different objectives without any conflict.
Let’s scan these objectives in details and see how they differ.
Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a competent plan.
However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks/investments for many years. You are comfortable to let them grow within your portfolio, reinvesting dividends to purchase more shares.
You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.
It is a strategy you often associate with elderly people who want to make sure they don’t outlive their money. Retired on nearly retired people often use this strategy to hold on the detention has. For this investor, safety is extremely important – even to the extent of giving up return for security. The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it.
Investors who use capital preservation tend to invest in bank CDs, Treasury issues, and savings accounts.
If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some highly-rated bonds.
All of these products produce current income on a regular basis.
Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs
The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes. Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options, and other special speculative strategies.
They have no love for the stocks they trade and, in fact, may not know much about them at all other than the stock is volatile and apt for a quick profit.
Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies. Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way.
If you want to try your hand, make sure you are using the money you can afford to lose. It’s easy to get habituated, so make sure you understand the real possibilities of losing your investment.
While the aforesaid objectives are the most common ones among investors today, some other investment objectives include tax exemption and liquidity.
Some people invest their money in various financial products solely for reducing their tax liability- as some investments offer tax exemptions.
Many investment options available are not liquid. This means they cannot be converted into cash instantly. Then they prefer for liquidity. Such investments include stocks, exchange-traded funds and liquid funds etc.
Your investment style should match your financial objectives. If it doesn’t, you should take professional help in dealing with investment choices that match your financial objectives.
Posted: March 2018