Before Investing - Ask Questions

There are 3 critical questions to ask and discuss with your advisers when contemplating the worth of the return from a particular type of investment.

These three questions are:

  • How stable is the return?
  • How variable is the return?
  • How volatile is it?

The returns from investment can be classed under these three headings and the correct answers to these questions is part of the information required when selecting an investment product.

  1. Stable Returns.
    A stable return is a return from an investment that has a variable or fixed rate of interest payable to the investor, whether the company makes a profit or not. They are attractive because of the stability and while the income return may be low compared to others, the risk factor is very low.

    They normally have a priority in payment over other creditors should the company run into financial problems and it is only where the business is liquidated or closed that this investment is at risk. An example of investments with returns considered stable include:

    • Government bonds. 
    • Local authority bonds. 
    • Secured and unsecured debenture stocks from financial institutions.
    • Certain types of corporate bonds.
    • Bank term deposits.

  2. Variable Returns.
    These types of returns are said to be variable returns because they depend on the circumstances and results achieved by the company issuing the investment. For investment in shares the return would be dividends paid by the company and they are variable because the final dividend approved depends on the company’s results.

    The decision to pay a dividend is made by the directors, who are responsible for approving the amount of profits paid out as dividends and the amount retained by the company for further use.

    Profits made by companies vary from year to year and so the dividend return is guided by this variation. It is a variable return because earnings from those shares are not fixed - they are determined from year to year and are dependent on the company’s results for the year, as well as other requirements for the funds by the company.

  3. Volatile Return.
    If the investments are shares then the volatile part of that investment is the capital gain or capital loss, which comes about through the fluctuation of the price of the shares. There are many factors contributing to the variation of the share price at any particular time, including the various cycles and market confidence in a particular company and therefore in its share price.

    It is important, therefore, when selecting investments that these three questions are clarified so that the final choice is based on what you (as an investor) want from your investment, ensuring it fits into the strategy you have for your investment portfolio.

© 2005 StartRunGrow

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