Investing: The Main Tools

After the Covid 19 pandemic, according to recent polls, more and more people are exploring the markets with various tools. As a matter of fact, more and more investors are making a money deposit to buy assets of various kinds, such as, for example, gold ETFs, stocks, bonds, etc., as explained on Moneyfarm’s website. An investor should diversify his or her financial portfolio with different types of assets to try to minimize the risk that such a path entails. Thus, it’s crucial to know how financial markets works and what the different financial instruments are.

So, here is a small summary of the various investment possibilities. However, it is necessary to specify that, as for any area, it is always preferable to turn to real accredited professionals such as stockbrokers who can dare to give real advice – simply to avoid scams or excessive risks. However, it is good to have a knowledge base, which is possible thanks to the easy accessibility to information by everyone. Therefore, let’s ask ourselves the right questions, starting with the basics.

What is a market and what does it mean to invest?

Markets are “places” where it is possible to buy and sell financial instruments. Financial markets are therefore not physical places, but trading venues, where demands meet offers. Obviously, every single market is governed by rules and managed by various operators, but to get an overview we can refer to the international market, which is the enlarged set of a system of rules and financial institutions in which individuals exchange securities.

The definition of financial market includes markets in the strict sense (for example the stock market, bond market, commodity market, etc.), operators (for example banks) and policies aimed at making the financial markets an place of efficient exchange. Therefore, investing means using your savings in financial solutions with the aim of obtaining, through a positive trend, a return, that is, a gain. One of the first steps is to establish the amount of time available to immobilize the capital you want to invest, and to know the rules of the system in which you want to make the investment.

How many and which tools are there?

The market is dynamic therefore it always develops new financial instruments, so a careful evaluation must certainly start from observing the market when you decide to invest. Starting the investigation on investment vehicles, one immediately realizes that there are many solutions ranging from stocks to bonds, government bonds and derivatives; these differ from each other in terms of risk and complexity.

We can therefore begin to outline the differences between the various instruments, which we recall are issued only by intermediaries with specific authorizations (such as banks, securities firms and asset management companies). There are many tools available to those who want to invest, but we can divide them into two large groups:

Mass titles

Such as equity and venture capital securities, bonds and other debt securities, government bonds, money market securities, traded securities and mutual fund units – where depositors receive a share of the fund managed by the company management. Following the same logic, ETF stocks are also increasingly used financial instruments.

Derivative contracts

These are based on underlying instruments, hence their name. In fact, their value can come from currencies, stocks and commodities. For example, spots and forward swaps or options are derivative contracts.

It is therefore easy to understand that the scenario is very varied and it is necessary to keep in mind that a security (of any kind it is) the more it pays and the riskier it is, it is therefore good, before investing, to be aware that it will be necessary to make forecasts and take risks. Indeed, risk is part of the game and it is the justification of returns.

The volatility of the markets does not exclude long periods of negative trends that could temporarily lead to negative investments and very often the triggers are not even remotely predictable (think of the recent crisis in Ukraine at the beginning of 2022).

As a result, they need to avoid acting on impulse and delay investing or deviate from their long-term investment plans. This is a crucial mistake because time is an investor’s best ally when it comes to investing. It is also necessary to choose to invest your savings based on the time, needs and resources actually available.

The golden rule

The greatest investment experts advise you to keep in mind a golden rule: diversify your investments. It is a simple and easy to understand advice. In fact, choosing to invest in companies belonging to different sectors or in stocks with opposite trends will allow you to offset losses with profits, mostly during a period as uncertain as the one we are experiencing.