Every entrepreneur out there knows all the challenges such a lifestyle includes. The fact that the hustle and the grind never seem to end for entrepreneurs is just the tip of the iceberg. One of the most challenging aspects of being an entrepreneur is finding ways to finance your endeavor.
Ideally, every entrepreneur should find a way to secure a steady finance outlet for their business. One of the easiest ways to achieve this is by making smart and calculated investments. But it’s also important to note that not just any type of investment will do. Instead, here are some types of investments all entrepreneurs should know about.
What Sort of Investments are We Talking About?
Aside from the obvious answer – investing in various assets (cash flow producing assets), we also need to mention other investments not many people talk about. Those investments revolve around time, effort, and will you put in your business. Many entrepreneurs make a mistake and stretch themselves too thin right at the beginning.
What you should do instead is take small but smart steps towards greatness. For instance, instead of trying to reach a global market with your business, focus on local first. Once you manage to penetrate the local market and raise awareness of your business there, you can continue to expand.
And now, let’s move onto different types of financial investments you should learn more about.
Treasury Bill Investments
The fact is that every investment opportunity carries a certain risk. So, the goal is to find an investment that will lower that risk as much as possible. One such investment is the investment made with the US government. Government issued treasury bills promise low-risk investment opportunities.
However, it’s also worth noting that where there’s low risk, there’s usually a low return. Treasury bills can be purchased through EFT or a mutual fund. The annual yields of treasury bills are most commonly around 2 to 3%.
Certificates of Deposit
The next type of investment on our list is CDs. They are a certificate of deposit issued by the bank and work as time-bound deposit accounts. Here, the investment risk is also fairly low. One can easily debate whether or not this type of investment is actually an investment or rather a savings account.
Especially if you consider the fact that every CD is insured up to $250,000 which eliminates the risk almost entirely. The rates you can expect to get from such an investment will depend on the term of the investment. That said, no matter if you choose short- or long-term, do know that rates are still quite low. At some banks, they even start as low as 0.10%.
Preferred Stock Investments
When it comes to investing in stocks, it’s important to mention that there are two main types: preferred and common stocks. Proffered stocks can be viewed as somewhat of a mix between bonds and common stocks. What this means is that you, as a holder, will be paid quarterly just like you would if you held bonds. But the difference is that there is no expiration date of the stocks in the end. Unlike the common stockholders, you also don’t get a say regarding the company’s future. But in case a company files for bankruptcy liquidation you will be paid after bondholders but before common stockholders.
Common stocks are the most popular type of investment, particularly among novice and average investors. This type of investment also tends to do pretty well over a longer period of time. But it’s worth noting that unlike preferred stock, investors can determine the value of the common stock.
There are numerous methods one can do so, but one of the best ways is using the discounted cash flow model. It allows you to determine the value of your investment based on its future cash flow projections. If you’re looking to diversify your portfolio, ETFs are probably the best way to go. Otherwise, you won’t really stand to gain a lot by buying single stocks.
Government Bond Investments
Government bonds, as the name suggests, are bonds issued by the government. They can be issued on the municipal, state, or federal level. It’s important to note that federal bonds are the safest type of government bonds. Simply due to the fact that crises on the state or municipal level won’t really affect federal bonds. As government bonds are backed by the credit of the US, it’s safe to say that the risk they carry is significantly low. Also, the rates offered by the government are more favorable than the ones offered by CDs.
Unlike the government bonds, corporate bonds are actually loans made to a big company, that later pays them off with interest. This type of bond also carries a greater risk than government bonds. What this means is that in case a company happens to file for bankruptcy, the bondholders may end up not being entirely paid back.
However, the interest rates they offer are usually quite tempting. Here, it’s also important to note that there are higher and lower-rating bonds. Both of them have fairly favorable rates. The interest payment is made periodically over the bond’s lifetime, where the final principle is repaid as the bond matures.
Options and Futures
Options and futures both work on a similar concept. With options, a buyer agrees to purchase an asset at a specific price on the pre-set date. With futures, it’s more or less the same, with the date being set somewhere in the future. The difference is that with futures you won’t really know how or if the price of the asset will fluctuate.
Of course, this makes this type of investment quite risky. That’s why many novice or average investors usually avoid options and futures altogether. However, high-end investors with huge portfolios seem to like options and futures as they bring some fun into the investment game.
If you’re looking to bring more financial security to your entrepreneurial efforts, try out some of these types of investments. But before you do, try to learn more about investing in general. The more knowledge you arm yourself with, the less there will be room for error.