Rare or serious diseases or injuries can easily result in hundreds of thousands of dollars in medical bills – bills that can quickly wipe out savings and retirement accounts, college education funds and home equity. Once these have been exhausted, bankruptcy may be the only shelter left, regardless of whether the patient or his or her family was able to apply health coverage to a portion of the bill or not. (Find out what you can do to avoid a financial meltdown when there’s a medical emergency.

Job Loss
Whether due to layoff, termination or resignation, the loss of income from a job can be equally devastating. Some are lucky enough to receive severance packages, but many find pink slips on their desks or lockers with little or no prior notice. Not having an emergency fund to draw from only worsens this situation, and using credit cards to pay bills can be disastrous.

The loss of insurance coverage and the cost of COBRA insurance also drain the job seeker’s already limited resources. Those who are unable to find similar gainful employment for an extended period of time may not be able to recover from the lack of income in time to keep the creditors at bay.

Poor/Excess Use of Credit
Some people simply can’t control their spending. Credit card bills, installment debt, car and other loan payments can eventually spiral out of control, until finally the borrower is unable to make even the minimum payment on each type of debt. If the borrower cannot access funds from friends or family or otherwise obtain a debt-consolidation loan, then bankruptcy is usually the inevitable alternative.

Statistics indicate that most debt-consolidation plans fail for various reasons, and usually only delay filing for most participants. Although home-equity loans can be a good remedy for unsecured debt in some cases, once it is exhausted, irresponsible borrowers can face foreclosure on their homes if they are unable to make this payment as well.

Divorce/Separation
Marital dissolutions create tremendous financial strain on both partners in several ways. First come the legal fees, which can be astronomical in some cases, followed by a division of marital assets, decree of child support and/or alimony, and finally the ongoing cost of keeping up two separate households after the split. The legal costs alone are enough to force some to file, while wage garnishments to cover back child support or alimony can strip others of the ability to pay the rest of their bills. Spouses who fail to pay the support dictated in the agreement often leave the other completely destitut

Unexpected Expenses
Loss of property due to theft or casualty, such as earthquakes, floods or tornadoes for which the owner is not insured can force some into bankruptcy. Many homeowners are likely unaware that they must take out separate coverage for certain events such as earthquakes. Those who do not have coverage for this type of peril can face the loss of not only their homes but most or all of their possessions as well. Not only must they then pay to replace these items, but they must also find immediate food and shelter in the meantime. Furthermore, those who lose their wardrobes in such a catastrophe may not be able to dress appropriately for their work, which could cost them their jobs.

More Money Going Out Than Coming In
In the end it comes down to having too much money going out, and not enough coming in. There are ways to predict this and protect yourself; by looking at how others have struggled, and building up emergency funds. There are many reasons why taxpayers are forced-or choose-to declare bankruptcy. But many times, common sense, sound financial planning and preparation for the future can head off this problem before it becomes inevitable. Those who are contemplating this possibility should seek a credit counselor or financial planner before choosing this alternative.

#1: Simple Business Model

It is not just about simplicity, but also something that you can understand. You must clearly define your circle of competence and stay where you are. It can be something that you learn while you are working or something that you spend time on to understand the business operation. To most, oil and gas business can be seen as so simple and yet very profitable, but to those who works in that industry will tell you, it is not as easy as what you think.

Do you know why this is so important?

When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company perform 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

#2: Wide Economic Moat

Simply said, the company should serve valuable niche market with price inelastic products or services. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries.
He prefers stocks which can finance their capital from operating cash flow with less borrowing as well as has strong pricing power. Meaning, the company can price their products as much as they want. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).

#3: Sustainable Growth

Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!

#4: Excellent Capital Management

Every company that is listed in the stock market were entrusted to manage the business on behalf of their shareholders. Therefore, it is the managements’ duty to utilise the available resources for the highest possible return. To do this, they have to think and act like an owner and avoid the ‘institutional imperative’ style of management (think for themselves and don’t care what will happen 20 years down the road). When they don’t have the capability to create at least $1 value from $1 reinvestment, they should return the capital back to the shareholders by giving dividends or share buybacks.

#5: Effective Management Team

Invest in company that have honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.

#6: Superior ROE

Why ROE, and not the other financial ratios? Well, return on equity indicates how effective the management team convert the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.

#7: Buy at Discount Price

Once the good stocks have been identified, now is the time to buy them. To make sure every $1 investment will generate $2000 in just 30 years, Warren Buffet have to make sure he buys the stock at the lowest price possible. In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Thus, he keeps himself buying the stocks when the prices are offered at pre-determined margin of safety. The margin of safety can be as low as 80 per cent discount from the calculated intrinsic value. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.

Investors using Derivatives for the followings :

• provide leverage or gearing, such that a small movement in the underlying value can cause a large difference in the value of the derivative
• speculate and to make a profit if the value of the underlying asset moves the way they expect (e.g. moves in a given direction, stays in or out of a specified range, reaches a certain level)
• hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out
• obtain exposure to underlying where it is not possible to trade in the underlying (e.g. weather derivatives)
• create optionability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level)

Terminology varies with country but collective investment schemes are often referred to as mutual funds, investment funds, managed funds, or simply funds (note: mutual fund has a specific meaning in the US). Around the world large markets have developed around collective investment and these account for a substantial portion of all trading on major stock exchanges.

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals).
The mutual fund will have a fund manager that trades (buys and sells) the fund’s investments in accordance with the fund’s investment objective.
In the U.S., a fund registered with the Securities and Exchange Commission (SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and net realized gains from the sale of securities (if any) to its investors at least annually. Most funds are overseen by a board of directors or trustees (if the U.S. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund’s investors.

From wikipedia & investopedia.

Why Invest In Stocks?

In terms of an asset class, stocks are hard to beat. Over time, they have higher returns than bonds or real estate. There are a few reasons stocks are such a great asset class, but stocks do have a few drawbacks as well:

Benefits of Stocks:

Returns: Over time, stocks outperform bonds, CDs (and other cash investments), and real estate. Stocks on average return about 10% a year, whereas these other investments generally return at about 5-7%.

Taxes: If you hold a stock for more than a year, your profits (when you choose to sell your stock) are taxed at long-term capital gains rate of 15% instead of your standard tax rate. Money you make from interest in a savings account or CD is taxed at your regular tax rate, which can be as high as 35%.

Diversification: Unlike real estate, it is easy to diversify your stocks. In fact, you can buy whole indexes of stocks, such as the S&P 500 or Wilshire 5000, by investing in ETFs that track those indexes. When you buy real estate, your returns are largely the result of how popular that area becomes. If you buy a house in an area that goes downhill, you will lose a lot of money on that house. For stocks, you can own a stock that literally goes to zero, but it’s not a big deal provided you invested in a wide variety of stocks.

Disadvantages of Stocks:

Risk: The stock market can vary wildly. If you invest in a stock, your investment can literally go to zero if that company goes out of business. However, if you are properly diversified, the risks associated with the stock market are not that bad. Over the long run, the stock market goes up. Nevertheless, the risks with stocks will always be higher than a guaranteed return with a CD or government treasury.

From many sources

Debt securities include government bonds, corporate bonds, CDs, municipal bonds, preferred stock, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities.

Most debt securities are traded over-the-counter, where most trading now conducted electronically. In daily, total value of debt market trading is much larger than that of stocks market, because debt securities are held by many large institutional investors as well as governments and non-profit organizations.

Debt securities on the whole are safer investments than equity securities, but more risky than cash.
Debt securities get their measure of safety by having a principal amount that is returned to the lender at the maturity date or upon the sale of the security.

Debt securities classified and grouped into many categories, most are classified and grouped by their level of default risk, the type of issuer and income payment cycles.

A Rental property
One basic method from Real Estate investment is by renting property.
It is as old as landownership where owner will rent his property to other person. Owner has an obligation to pay taxes, mortgage, and other expenses or cost for property maintenance. All of this expenses can be charge from tenant plus some profit, but it will result in a very high rent charge. So it is more reliable to charge just some amount of and be patient till mortgage has been paid, at which time rent charge will become profit. Moreover property may also appreciated in value over the course of the mortgage (real estate has consistently increased in value since 1940, according to the U.S. Census Bureau), leaving the owner a more valuable asset.

Real Estate Investment Groups
People who wanted to own a rental property but don’t have time to manage may have their solution through these groups. How is it work ? first, a company built apartments or condos then let individual investor to buy them through the company, thus called joining the group. Investor could buy one or more units, but the company operating the investment group will manages all the units collectively (maintenance, advertising units or interviewing prospect tenants). And in return for this management, the company takes a percentage of the monthly rent.

Real Estate Trading
Real estate traders are way different from the buy-and-rent owner. They (Real estate traders) tend to buy properties with the intention of holding them for a short period of time (sometimes less than three to four months), with expectation to sell them for a profit. This usually called flipping properties and is based on buying properties that are undervalued o in a very hot market.

REIT (Real Estate Investment Trust)
REIT is created when a corporation (or trust) uses investors’ money to purchase and operate income properties. And in return corporation must give back of its 90% of income which maybe taxable in the form of dividends to its investor to keep its status as an REIT. Thus, REITs reducing or eliminate paying corporate income tax, whereas a regular company would be taxed its profits and then have to decide whether or not to distribute its after-tax profits as dividends.
REITs can be classified as equity, mortgage or hybrid. and were bought or sold on the major exchanges just like any other stock.

Investing in real estate has its own advantage in term of Leverage. The exception is for REITs. Mortgage gives investor a chance to control a whole property and its equity by paying only a fraction of its total value. Some mortgage requires 20% down from total value, but some other requires as small as 5%.

The Bottom Line
Real Investment gives a potential income in many ways, however still smart money management and strategies is required to assure a profitable investment.

“Saving” differs from “savings.” The former refers to an increase in one’s assets, an increase in net worth, whereas the latter refers to one part of one’s assets, usually deposits in savings accounts, or to all of one’s assets. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable.

Savings accounts are accounts maintained by retail financial institutions that pay interest but can not be used directly as money ( for example, by writing a cheque). These accounts let customers set aside a portion of their liquid assets while earning a monetary return.

Saving is closely related to investment. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth.

In many instances the terms saving and investment are used interchangeably. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. To help establish whether an asset is saving(s) or an investment you should ask yourself, “where is my money invested?” If the answer is cash then it is savings, if it is a type of asset which can fluctuate in nominal value then it is investment. There may be problems in saving money for the long term; in about 30 years its value will decrease to about 1/2 its original value due to inflation, assuming a 2-3% inflation rate.

From Many sources, mostly from Wiki

Cash investments
Savings is considered as an investment also certificates of deposit (CDs) and treasury bills. It gives a small return rate and are risky considered with period of inflation. People shall at least have one of this cash investment method to support their future at least for a short period.

Debt securities
Safer and least risk investment instrument, but still its generally give lower return compared with equities.
This form of investment give returns in form of fixed periodic payments and possible capital appreciation at maturity.

Stocks
Its volatile and riskier than bonds. By buying stocks which also known as equities, makes you become a part-owner of business and entitles you to a share of profit generated by the company

Mutual funds
A collection of stocks and bonds and its prime advantage that you do not have to bother with tracking the investment. Its involves paying a professional manager to select specific securities for you. There may be bond, stock- or index-based mutual funds.

Derivatives
These are financial contracts the values of which are derived from the value of the underlying assets, such as equities, commodities and bonds, on which they are based. It can be in the form of futures, options and swaps and are used to minimize the risk of loss resulting from fluctuations in the value of the underlying assets (hedging).

Commodities
Traded items in commodities market are agricultural and industrial commodities. Items need to be standardized and must be in a basic, raw and unprocessed state. The trading of commodities is associated with high risk yet give high reward and it requires specialized knowledge and in-depth analysis.

We will discussed about each of these instruments later.

Taken From many sources.

The term “investment” is used differently in business and in finance.
In finance, investment is the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money.
In business, the purchase by a producer of an asset or other real means, such as durable equipment or inventory, in the hope of improving future business or receiving future gain without any work.

Why people invest ?
Unless you can predict your future, investment is not necessary for you.
By investing we can expect that what we have spread will grown and in the future we can harvest them.
Most people are working and spending all their income without thinking about this, but for Riches, money has to be first saving and invest and then money will work for you. This is what Rich people know and poors dont.

So if financial freedom is what you dreamed about, make more invest, diversify your money and later money will work for you.
Later we will discuss about investment instruments that might fits you.

Sources : From many source