Investing our money correctly requires that we take into account different concepts that will help us select the correct alternatives 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 must be clear about the following concepts:
What is financial profitability?
We can establish Financial benefit as the percentage link that exists between the benefits that we obtain from an investment of own capital. The concept is of utmost relevance for the partners and owners of a company since it is the one that indicates how much money they will earn after having invested it.
In this circumstance, the concept applies to fixed and variable income and refers to the benefits (or income) that originate certain financial assets such as stocks, bonds or bills. The difference between the two has to do with the risk investors take when selecting either one.
What does it mean to invest?
Investing means depositing our money in different financial products so that they generate financial benefit. This starts from the premise that an investor is the person who decides deposit your savings (or capital) in one of the financial instruments available in the market and that best suits our needs.
An example of this are the actions, which are a financial product because for companies to function they need investment partners who provide the money necessary 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 data and processes necessary to minimize the level of uncertainty of your financial products.
What is financial risk?
The financial risk It can be established as the probability that an event occurs in which we lose our capital to a greater or lesser extent. It encompasses both the achievement of lower than expected results, even going so far as to completely lose that capital. exists different types of risk and we must take them all into account before selecting where to invest:
- Market risk: It is one that is related to fluctuations in the financial markets.
- Credit risk: There is the opportunity 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 get the necessary liquidity to take over its obligations even when it has the assets to do so.
- Operational risk: It is the risk that is assumed by the opportunity of occurrence of economic 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 streams that an investment will generate. For this to be feasible, they must be investments that have very accurate historical data or predictive measures. In this type of investments access all those financial assets and securities such as obligations, promissory notes, bills and bonds. It also falls into this category real estate rental and savings systems As the savings accounts and time deposits.
In that financial market, Before the transaction of these financial products takes place, a prior negotiation is necessary to agree on the conditions and characteristics. We must pay attention that to obtain a fixed income instrument we must be prepared 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.
The disadvantage of fixed income Is that the profitability generated is much lower than that of equities, but with the great utility 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 profitability percentage is previously known and the fluctuation of this is almost nil.
In general, Fixed income is subject to different conditions. availability of money. This is why when we decided to invest in this type of financial products 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, variable income 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 multiple macroeconomic and microeconomic factors, such as the performance of the company, the behavior of the market or the evolution of the economy.
Some examples of Stocks are stocks, mutual funds, and convertible bonds. Although it is true that in general equal investments originate greater profitability, we must pay attention that they present a greater risk. Capital investments are generally short and medium term. To trade them, you need to have a stable mindset to trade our money with caution.
The stocks have a high level of uncertainty, since the microeconomic or macroeconomic data that may affect the development of the company, and thus its commercial and financial success, are unknown. Regarding the time to transfer this financial instrument, we find that minute by minute many shares 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 select the type of income that suits us best?
This is a definition called Risk-return binomial which quotes 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 higher returns. Despite that, the risk factor it tells us that there are greater chances that the invested capital will disappear completely. This is why many people opt for a fixed income, in which the risk is zero or very small.
Another factor that we must pay attention to when selecting a financial product it is the comfort that each one of them offers us. If the best thing for us is to be sure that we will have a greater capital once the investment period is over, it is best to select one. fixed income that allows you to increase money by generating interest. 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 operation of the investment instrumentsThey have the comfort of being able to obtain 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 select those investments that will generate more profitability, but also know how to react to a moment of loss of capital to get it back and incur the least amount of loss feasible.
From this dynamic we can conclude that both types of investments have significant advantages in terms of performance and liquidity. The best thing to do is to analyze the economic situation in which we find ourselves and choose if what we need is an investment in which we are not in a hurry to get our money back as long as we are sure that it will be there, or if we want to get large amounts of money in a short time knowing that this can lead us to lose all our capital, no matter how small or large.
The most recommended is invest in instruments a lot of fixed income and variable income, thoroughly researching the entire context before making a choice. Most investors have fixed income financial products 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 product, as long as we have the necessary knowledge and experience to risk investing intelligently in an equity investment instrument, being aware that there is a risk that must be assumed and have an action plan in case of loss of capital.
