As an entrepreneur, you know that you must take certain risks when investing in your business. But you also know that every penny counts. Therefore, it is key that the money you invest in your company (and with so much effort!) Is as productive as possible.
The better we know how to invest, the more productive and competitive we will be, we will obtain the highest possible profit and we will grow our business in a sustainable way.
In this post, we explain in a simple way the main alternatives and the types of investment that you can make as a business owner.
What are the most common types of investment for small entrepreneurs?
If you intend to invest in your business for its long-term growth, you have many options and you must weigh them carefully. These are the most common types of investment:
Companies divide ownership into a number of shares, sell them, and get money in return (you can see how the stock market works here). When you buy a stock, you are investing in a small part of the earnings and assets of a specific company.
As an investor, you can buy and sell shares of different companies. If the value of the stock goes up, you can sell them and make a profit. In some cases, companies distribute dividends (a part of the profits that some companies periodically pay to their investors).
You can get big profits but do not forget that it carries a risk (here you can consider the risks of the stock market): if the economic activity of the company in which you have shares falls, those shares lose value. And if that company goes bankrupt, you will lose all your investment.
A bond is a fixed-income investment. It consists of a loan that you make to the issuer of that bond (a company or the government) in exchange for regular payments in the form of interest. The invested capital is amortized on the maturity date of the bond.
They are usually considered lower risk than stocks. Similarly, state or city bonds are often considered safer than corporate bonds and therefore offer less interest for your money.
They have less return than stocks.
Funds are common pools of money that are established for a specific purpose. They are usually managed and invested by professionals.
As an investor, the business owner can put money into the funds to earn a return. They have the advantage of accessing a large number of investments through a single money transaction.
These are the main types of funds:
Mutual funds: They gather money from investors and invest it in a diversified portfolio of stocks, bonds, or other assets. If the fund makes money, you can distribute a portion of that money to investors. If the fund increases in value, you can sell your stake in the fund and earn money. To invest, you pay an annual rate of expenses.
Indexed funds: It is a type of investment fund that follows a benchmark stock index (the Standard & Poor’s 500 indexes): instead of paying a manager to decide the investments, you have a portfolio of stocks of the companies of the aforementioned index. These funds can rise in value when benchmark indices increase in value. They have fewer expenses than an investment fund.
Exchange-traded funds (ETF): This is a type of index fund. The difference between an ETF and an index fund is that throughout the day you can buy and sell ETFs like stocks. In other words, the price of the ETF varies throughout the day (whereas investment funds or indexes are traded only once at the end of the day, regardless of the time the investor buys). It can be very useful for small investors because it allows them to diversify at a low cost.
Your investment is managed by an expert with the knowledge to give you a great return on investment. The diversification of these funds translates into a reduction in risk.
The earnings you receive will be taxable, and the fund will charge you administration and withdrawal fees.
4. Banking products
Certificates of deposit: They are issued by banks and credit unions, offering an interest if the investor leaves the money without touching it for a certain time, and with penalties in case of withdrawing it before the end of the term. There is a great variety, with different interest rates, durations, and temporary offers in traditional and online banks.
Savings accounts: There are high yield savings accounts (above inflation), designed for future emergencies or a planned high purchase also thinking about the future. They are usually offered by institutions other than banks with physical branches, which bear higher expenses.
Unlike stocks and bonds, they are a safer investment (guaranteed rate of return) and offer interest rates above inflation.
If you need the money, there are penalties for early withdrawal and you have to pay attention to the commissions, charges, and requirements. Depending on them, you could even lose money.