Investing our money correctly requires that we keep in mind different concepts that will help us choose the correct options for invest our money. Two of the concepts that we will find most frequently are those of Fixed Income and Variable Income. To understand them correctly we need to be clear about the following concepts:
What is financial profitability?
We can define Financial profit as the percentage relation that exists between the benefits that we obtain on an investment of own capital. The concept is of utmost importance for partners and owners of a company since it is the one that indicates how much money they will earn after having invested.
In this case the concept applies to fixed and variable income and refers to the benefits (or income) generated by certain financial assets such as stocks, bonds or bills. The difference between the two has to do with the risk investors take when choosing either of the two.
What does it mean to invest?
Investing means depositing our money in different financial instruments so that they generate financial profit. This starts from the premise that an investor is the person who decides deposit your savings (or capital) in one of the financial products available in the market and that best suits our needs.
An example of this are the actions, which are a financial instrument because for companies to function they need investment partners who provide the money needed to start or continue operating. The more successful the company, the higher the earnings of the investing partners and the higher the profitability.
What does level of uncertainty mean?
Uncertainty is one that occurs in a situation in which the probability of a certain event is not fully known. In finance it is a widely used concept since investors seek to have all the necessary data and processes to reduce as much as possible the level of uncertainty of its financial instruments.
What is financial risk?
El financial risk It can be defined as the probability that an event occurs in which we lose our capital to a greater or lesser extent. It encompasses both obtaining lower than expected results, even going so far as to completely lose that capital. exist different types of risk and we must take all of them into account before choosing where to invest:
- Market risk: It is one that is associated with fluctuations in financial markets.
- Credit risk: It is the possibility that one of the parties to the contract does not assume its obligations.
- Liquidity risk: It is the one that assumes that one of the parties to the contract may not obtain the necessary liquidity to assume its obligations even though it has the assets to do so.
- Operational risk: It is the risk that is assumed by the possibility of occurrence of financial losses caused by failures in processes, people, systems or technology, as well as other unforeseen events.
How does the Fixed Income work?
For there to be a fixed rent You must know in advance the income flows that an investment will generate. For this to be possible, they must be investments with historical data or very precise prediction measures. In this type of investments all those financial assets and securities such as obligations, promissory notes, bills and bonds. Also fall into this category rental real estate and savings systems as savings accounts and time deposits.
At financial market, Before the transaction of these financial instruments takes place, a prior negotiation is needed to agree on the conditions and characteristics. It must be taken into account that to acquire a fixed income instrument we must be ready to invest large amounts of money, since the percentage of return is very small, only by investing large amounts of money will we see considerable gains in our savings.
La disadvantage of fixed income is that the profitability generated is much lower than that of equities, but with the great advantage that the risk of losing all or part of the invested capital is much lower. This is why it is said that in the fixed income the level of uncertainty It is minimal, since the expected percentage of profitability is previously known and the fluctuation of this is almost non-existent.
Normally, fixed income is subject to different conditions availability of money. That is why when we decide to invest in this type of financial instruments we must be aware that it is a long-term investment. This is very useful in retirement savings systems or pension plans.
How does Variable Income work?
For its part, equities It is the one that occurs in investments in which the income streams that will generate the operations. These can be very high or very low, or even negative, since they depend on various macroeconomic and microeconomic factors, such as the performance of the company, market behavior or the evolution of the economy.
Some examples of the Equities are stocks, mutual funds and convertible bonds. While it is true that generally equity investments generate greater profitability, we must take into account that they present a greater risk. Equity investments are generally short and medium term. To operate them you need to have a stable mentality to operate our money with caution.
La equities have a high level of uncertainty, since the microeconomic or macroeconomic data that may affect the development of the company, and therefore, its commercial and financial success, are not known. Regarding the time to transfer this financial product, we find that minute by minute many are sold equities listed on the financial market. Another characteristic is that in this type of investment we can invest any amount of money, from very small amounts to values that exceed millions.
How to choose the type of income that suits us best?
This a term called Risk-Profitability binomial which cites that the higher the risk, the higher the profitability. At first glance we might think that in this case the most logical thing is for everyone to invest in a variable income with which they will obtain more profitability. However, the risk factor it tells us that the chances are higher that the capital invested will disappear completely. It is for this reason that many people choose a fixed income, in which the risk is zero or very small.
Another factor that we must take into account when choosing a financial instrument it is the comfort that each one of them presents to us. If the best thing for us is to be sure that we will have more capital once the investment period is over, it is best to choose one fixed income that allows you to increase money through the generation of interests. In this system we can also forget about the money invested and let it grow by itself.
However, those people who have extensive knowledge about the functioning of the investment instrumentsThey have the comfort of being able to acquire large amounts of money in a short time as long as the operation in which they invested has been successful. These people not only know how to choose those investments that will generate more profitability, but they also know how to react to a moment of loss of capital to win it back and incur the least amount of loss possible.
In this way we can conclude that both types of investments have significant advantages in terms of performance and liquidity. The most successful thing is to analyze the financial situation in which we find ourselves and decide if what we need is an investment in which we are not in a hurry to recover our money as long as we are sure that it will be there, or if we want to obtain high amounts of money in a short time knowing that this can lead us to lose all our capital, no matter how small or large it may be.
The most advisable is invest in instruments both fixed income and variable income, thoroughly investigating the entire context before making a decision. Most investors have fixed income financial instruments In which they invest in a formal and stable way and from time to time they take risks for a variable income. Having a diversified portfolio helps us so that our capital does not depend entirely on a single financial instrument, as long as we have the knowledge and experience necessary to risk investing intelligently in an equity investment instrument, being aware of that there is a risk that must be assumed and have an action plan in case of loss of capital.