When you’re considering investing in financial instruments like stocks, bonds, and mutual funds, it can be helpful to think of their three primary uses: as vehicles for making money, as protections against losing money, and as ways to achieve specific goals. This article will explain each of these uses in more detail.
There are three main reasons to invest in financial instruments: to gain capital, to produce income, and to protect against risk.
Capital gains and losses are the primary source of income from investing in financial instruments. They depend on the market price of the instrument at the time of purchase and sale. The higher the market price, the greater the potential for capital gains or losses.
Financial instruments can also provide protection from risk. For example, buying a CD ladder allows you to spread your investment risks over a number of years in order to lock in a fixed rate of return. Conversely, selling short (selling securities that you do not own) is an investment strategy that allows you to profit from movements in the price of a security without actually owning it.
Saving for a rainy day
1. Investing: People use financial instruments to save for a rainy day because they know that the value of the money will be stable even if the economy is unstable.
2. Speculation: Some people use financial instruments for speculation, which is when they hope to make money by buying and selling them at a higher or lower price.
3. Hedging: People also use financial instruments to hedge their bets, which means that they are using them to protect themselves from potential losses in other areas of their lives.
Preparing for a financial emergency
There are three primary uses for financial instruments: to save, to invest, and to pay bills.
Saving: Most people use financial instruments to save money. For example, they may use a 401(k) plan to save for retirement.
Investing: People invest in financial instruments to make money. They may invest in stocks, bonds, or mutual funds.
Paying Bills: People use financial instruments to pay their bills. They may use a credit card to buy groceries or rent a property.