Why invest money? The answer is simple. People invest money because they wish to have even more money at some point in the future and believe that investing will provide an acceptable return on the invested capital through interest, dividends, or capital growth. If investors did not believe that investing would provide an acceptable return, they might place their money under their mattress, in a cookie jar, or in a savings account instead.
Investors are able to choose from a variety of investment types such as common stock, preferred stock, bonds, mutual funds, properties, options, and futures. Each investment form carries its own advantages and disadvantages. While the investment vehicle provides the potential for future returns, it is also accompanied by inherent risk of loss. As portfolio managers are making decisions, they must evaluate the relationship between risk and return and determine the levels that are acceptable and desirable given an investor's circumstances and goals. Therefore, risk assessment and management often include the utilization of risk minimization techniques such as hedging with futures, options, and other derivatives.
For stocks, bonds, and other financial instruments traded on the open market, trading prices are readily available. However, in theory, investors want to purchase investments that are currently undervalued on the open market, while selling investments that are overvalued. Consequently, financial analysts and portfolio managers use a range of techniques such as capital asset pricing models, dividend discount models, financial ratio analysis, and technical analysis to assess the fair value of investments and evaluate portfolio performance.
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