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Sunday, September 24, 2017 
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Getting started

From saving to investing in the stock exchange

The purpose of saving is to create money reserves with the lowest possible risk, if any.

The most suitable instrument for saving money is usually the one that provides high liquidity at a low risk. Of course, by meeting these conditions, the interest rate available for such instruments would also be low. Examples of best financial instruments for saving purposes are bank deposits, government securities (treasury bills in particular). The gain to be earned from these financial instruments is represented by the interest rate that can be either fixed or variable.

Investing, as opposed to saving, has as main purpose the increase of the capital base and making a profit, within acceptable risk boundaries, which may differ from one person to another.

Investments include an extensive list, such as lower-risk bonds, issued by private companies (corporate bonds), higher-risk shares listed on the stock exchange or even riskier derivatives. All these are financial instruments.

The gain obtained from investment in such financial instruments is represented by the difference between the acquisition price and the sale price. In addition, owners of shares, given their status as shareholders of the issuing entities, may receive dividends which are added to the investment return. Holders of bonds issued by private companies receive an interest (fixed or variable).

Main characteristics of saving and investing

Saving Investing
Objective Accumulation of capital Increase of the capital base and making a profit
Risk Taken Low High, determined by the financial instrument
Potential Return Low High, determined by the financial instrument

Establishing your investment strategy and analysis

Each investment should be accompanied by two additional activities – the establishment of investment strategy and the analysis of market features and the available financial instruments.

The investment strategy for investing on the capital market includes the overview of:

  • the investor’s objectives
  • the envisaged time horizon for making the investment
  • the desired level of liquidity and any restrictions
  • the maximum acceptable risk.

Once the investment strategy is elaborated, the next step is to select the financial instruments that will be included in the portfolio, combined in order to meet the criteria mentioned in the strategy. The selection implies a thorough analysis of companies and various financial instruments, of their financial performance over the past years, in order to identify future development trends.