Ultimate guide to the Statement of Cash Flow for your small business

1- The Basics of Investing: What Is Investment?

Investment is what you do with an asset or item you have bought with the goal of earning money or increasing its value. In simpler terms, money works for you in the form of more than just savings, but potential for growth. Unlike stashing wealth in a traditional savings account, in which interest rates tend to be minimal, investment opens the door to greater returns but not without a risk of losing money.

      Why Invest?

• Instead, Grow Wealth: If invested wisely, money can build over time because of the power of compounding.
• Outplace Inflation: Many investments will earn you a better return than inflation rates and preserve your buying power.
• Meet Financial Goals: Whether retirement, home ownership, or funding education, investments may help achieve important financial goals.

     Investment in Vehicles: Investment vehicles are the gadgets or contraptions you use to invest your money. They come in various forms:

• Stocks: Shares of a company that represent part ownership. Shareholders make money in the form of dividends and through the rising stock price.
• Bond: A government or company issues, until it returns the principal at maturity, pays periodic interest.
• Securities Fund: Investment vehicles made of a pool with money collected from several investors with a view to investing in a number of securities.
• ETFs (stock market-traded funds): As a mutual fund, but stock exchanges are purchased and sold when they were individual shares.
• Real Estate: Actual buildings bought in order to collect rent or appreciate.
• Commodities: Raw materials such as gold, oil or food that can be invested in directly or through futures contracts.

2- What Risk and What Return: The Two Faces of Investing

All investment is risky, but with that also comes potential return. Risk vs. reward is fundamental to investing.

    What Is Risk?

From an investment standpoint, the risk is the potential of losing some or all your investment. Another risk profile: Other investments have different risk profiles. In general, the larger the potential return from an investment, the greater its risk.

    Types of Risk:

• Market risk: Risk of damage caused by market changes.
• Credit risk: A borrower as a borrower (such as a bond issuer) fails to fulfill the payment.
• Liquidity risk: The risk of not being able to sell a property quickly, without the price.

Inflation Risk: The risk that inflation will decrease the purchasing power of your returns.

    What Is Return?

Return is the profit or loss derived from an investment over a certain period. Returns can be divided into two types: capital gains (which are the returns realized from an investment that was sold for more than the purchase price) and income (like dividends on stocks or interest on bonds).

    The Risk-Return Trade-off: Investors must weigh risk against the possibility of reward. Usually, low-risk investments (think government bonds) return lower rates, while high-risk investments (such as stocks, or real estate) can potentially produce higher returns.

     Diversification: There's something to be said for not having all your eggs in one basket - diversification is good risk management. This means investing across a range of asset classes (like stocks, bonds, real estate, etc.) so that if one particular investment performs horribly, it won’t drag down the entire portfolio.

3- Time Value of Money: Compound Interest explained 

One of the most significant concepts in money is the time value of money, the idea that money today is worth more than the same amount of it in the future (if invested and earning interest). This is the power of compound interest.

      Compound Interest: investor’s best friend: Compound interest is the concept of earning interest in your investment and then earning interest in those earnings. Essentially, it is interest over interest. If you deposit $1,000 at a 5 percent annual interest rate, for example, you’ll have $1,050 after the first year. If you invest $50 in profit, next year, your $1,000 investment will grow based on the $1,050, not just the original $1,000.

It is this compounding that grows your money faster and why getting started early can make a big difference in the value of your investment portfolio.

      Rule 72: The Rule of 72 is a quick and dirty calculation that tells you how long it will take your money to double at a certain interest rate. You divide 72 by your annual rate of return. For instance, when we compare it with the 8% return, we will realize that it will take 9 years (72 ÷ 8 = 9) to double our investment.

4- Asset Allocation: Your Portfolio Blueprint

Asset allocation refers to the question of how much of your investment portfolio you should invest in different asset classes. This is generally determined by what your investment objective, time horizon and risk tolerance is.

Why Asset Allocation Matters:

• Risk Management: Not all assets move in the same way under all market conditions. You lower the overall risk of your portfolio by spreading it out over a variety of asset classes.
• Objective Consistency: The scheme of your asset allocation should be aligned with your objectives. For instance, relatively young investors with long time horizons can generally afford to maintain a higher exposure to riskier assets, such as stocks. On the other hand, older investors nearing retirement may desire a more conservative mix of more bonds and cash.

Shared Asset Allocation Models:

When determining how to maintain your portfolio, you ‘ll generally pick between active and passive investment strategies.

        Active Investing: While you can point to successful active investing, the frequent buying and selling of investments trying to beat the market, as evidence this is possible, on average, it does not work out that way. Active investors or fund managers study the market trends, the individual companies and the economy so that they can make informed decisions. It has its reward, being the possibility of better returns, but is also more expensive and more of a timing game.

       Passive Investing: Passive investing means instead of trying to “time” the market by buying and selling, you buy and hold. Passive investors don’t try to outperform the market; they try to match the market’s performance. Both popular options for passive investors, index funds and ETFs are designed to mirror the performance of a specific market index (such as the S&P 500). Passive investing is usually lower cost and has less long-term risk.

     Which Is the Plan for You?: Whether you prefer active or passive investing is going to be a function of your risk tolerance, time horizon and how much you want to be involved in the day-to-day management of your investments. 'Passive investing works for people who are looking for ease and comfort and who are happy with market returns but if someone is ready to put in work and time, they should consider active investing.

6- Following the Money: The Path of 25 Venture Capital and Private Equity Investments

Investing, after all, is money traveling in a cyclical financial flow, an effort to take money and push it from one phase to the next, ideally growing more valuable in each phase than the one before.

      1- Capital Inflow: You begin with the capital you have whether it’s savings, an inheritance, income. This capital flows into different types of investments (stocks, bonds, real estate, etc.).

      2- Asset Growth: Whatever assets are invested will begin to appreciate by way of dividends or capital gains or interest payments. There, the amount of your investment can go up and down with the market, but the hope is that over time, your investment will increase in value.

      3- Capital Returns: You may also at some point sell or otherwise liquidate an asset. It’s possible to sell them to take profits, shift investments, or just get cash. The funds produced when you sell your investment (capital gains or income) serve as a foundation for new investments or as means of consumption.

      4- Reinvestment: Because you’re reinvesting your gains, your base capital keeps on growing, making for an even stronger compounding effect. Re-investment is a crucial part of building long term wealth.

      5- Consumption: At any given time, an investor can put his or her investment returns to consumption (like education, homes, or retirement).

7- Long-Term vs. Short-Term Investing: Choosing Your Ideal Timeframe

Investors often must decide whether they adopt a short-term or long-term strategy, with different risk and reward characteristics.

    1- Long-Term Investing: This is when you invest for the long term, usually for 5 years or more in the same investment. Long-term investors pay little attention to short-term market noises but rather the probability of enduring growth over time.

• Pros: Compounded returns, less worry about market volatility, and usually lower taxes.
• Cons: Clarifies for you not just what to expect in terms of taxes and withdrawal requirements but also how to assume the risk and whether it’s better to have you pay tax or your heirs.

    2- Short-Term Investing: Short Term Investing, by contrast, wants to take advantage of market movements on a shorter horizon (less than 5 years). It’s a gambit commonly employed by day traders or people chasing the fast buck.

• Pros: Possibility of a big payday in a short time.
• Opposition: Risk, more time -consuming and taxed at a higher price with short -term benefits.