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Basics of finance and investment - Essay Example

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From the time of the Great Depression (and maybe because of it), the words “investing” and “stock market” have been associated by many of us with the words “risk” and “gambling,” with good reason. The most spectacular news regarding the stock market is that a…
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Basics of finance and investment

Download file to see previous pages... Bad news is always remembered more because it is human nature that people’s miseries create a stronger impact in our minds. But it should also be remembered that if there is a Leeson, there is also a Warren Buffet. Money was lost on internet stocks, but just before that, money was also made on the same internet stocks. And Bernard Madoff was one of a kind, who took advantage of people’s confidence to him as a SEC consultant. There was nobody before or after him who operated at the level he did, because the there is usually in place an effective regulation of the market and most such operators are caught early on (Arnold, 2004).
If there are no extreme developments such as market crashes and financial crises, investing for value long-term has always been sound strategy for enhancing wealth. There are several vehicles for investment: the savings account, the money market, certificates of deposit and common stocks are some of them. Each of these instruments is associated with a particular level of rate of return. The rate of return is the percentage gain an investment makes – in short, how much yearly earnings are expected as a proportion of the capital invested. The rates of return fluctuate, but they maintain a more or less consistent relationship with those of the others. For instance, the savings account in a bank would normally have the lowest rate of return which is denoted by its interest rate. The money market placement has a slightly higher interest rate, followed by certificates of deposit, and then the stock investment. The average rates of return for each of these instruments is shown in the second row of Table 1 (source: UK National Statistics Online).
The rate of return plays an important part in the concept of compounding. In compounding, the returns that have been accumulated for one year becomes part of the ...Download file to see next pagesRead More
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