​Investing means buying capital assets, valuable assets, based on expectations of:

•     An increase in value by time.
•     Or the conviction that it can provide a new income source.
•     Or both.

Objective to invest money vary between people. Some invest to provide additional income for the future to secure necessary needs that they might not be able to provide without investment. Others invest their money in the hope of compensating the bad effects of inflation on their investments as time passes. Some even invest just for the thrill of a challenge. Unfortunately, there is no right answer for what makes a person a successful investor? A successful investor could be the one who gains profit from selling the investments or the one whose investments’ income helps in achieving the financial goals he /she has set to him/herself.

But how can an investor supports the investment prospects for his success? The best way to do it is to increase awareness on the different mechanisms of investment and its different vehicles such as shares and investment funds. Achieving success is supported by knowing the capital market mechanism and how the regulations of the Capital Market Authority contribute in his protection as an investor. The more knowledge of these mechanisms increases ability to seize investment opportunities and avoid investment risks.

Savings vs Investment

When we invest then we buy a share or more from the shares of a particular company or a group of companies. The return if this investment is based upon the company’s performance or the companies in which we invested. When these companies gain profits then it gives part of these profits to the one who invested in it and the investor also can profit from selling the shares of the company that have high prices as a result of its high profits. If the performance of the companies was against all the speculations, then it will not distribute dividends and the price of its shares will consequently drop.

Asset Allocation

Asset allocation means choosing a different set of investment assets in the investor's portfolio, such as stocks, units of investment funds, real estate and others, which all vary in risk levels. The aim of that is to acquire high-risk assets with high returns and low risk assets to help stabilize the investment portfolio in case high risk assets achieve less than expected returns. Diversification is to add diversity to the investment portfolio. The investor can, for example, diversify his/her investment portfolio by investing in a number of companies in different industries, instead of investing in a company or two, or one sector or sectors. Diversification can be done by investing in companies of different sizes, rather than focus the investment portfolio on leading companies or shares of small companies.

Investment Diversification

Diversification helps to reduce the negative effects that can be left by the performance of a company's share on the investment portfolio. In other words, if the investor only invests in the shares of one or two companies, the investment portfolio performance will be affected if the performance of them was below expectations. But if the investment was in eight or nine different shares in varying sectors, and the decline has occurred in the performance of one of these shares, the good performance of the remaining shares in the portfolio can compensate for poor performance resulting from the loss of that particular share.

Investment Methods

The method of investment is the way of investment that the investor follows to apply his/her investment strategy and to achieve his/her goals. Whether the investor invested directly in stocks or in investment portfolios, it is important to take into account the so-called investment method. The difference in investment methods can mean that the investors who want to achieve the same results are in fact achieving different results based on the circumstances of the market.

Some of the most important investment methods are:

• Conservative method: this method focuses on invested capital by avoiding threatening risks. Usually this type is best with older investors who are approaching retirement and the chances to compensate their capital are lost.
• Bold method: this method means taking higher risks compared to the previous method in order to achieve greater returns. The bold investor buys shares of unknown or new companies that either would distribute high profits or would end up losing.
• The method based on value: the investor focuses on value, looks for securities that are believed to be sold less than their fair value, and supposedly may return to their fair prices when the shareholders figure out its fair value.
• The method based on growth: this method aims to own the shares with expected increase in price and therefore its revenues. That is in a larger scale than the total revenue of the traded shares.
• Diverse method: This method combines value and growth at the same time. It means that an investor seeks to balance the investments valued less than their fair price, and those that are expected to have high growth.
• The contrarian method: the method where investors, for different reasons, buy the securities that others avoid.

Inflation

One of the most important reasons to invest is to lessen the side effects of inflation on savings. Inflation can be described as:

• The huge and continuous increase of the cost of most services and commodities.
• Continuous decrease in the currency buying power ( buying power of the Riyal).

Inflation is the opposite of stable prices and it usually causes the wearing out of the purchasing power by time. If inflation continues, the individual will find himself/herself for a higher income every year to maintain his lifestyle. A part of his/her need for a higher income can be fulfilled by the annual increase in his/her salary while the other part can be fulfilled by his investments. The level of inflation or increase in prices can vary from one period to the other or from a country to other. There are many factors affecting the rate of inflation, including: local and global events, general economic conditions, the level of consumer spending, and government economic policies, especially financial and monetary policies. For the past two decades, KSA’s inflation rates are very low.

Inflation effect

To explain how inflation affects someone’s savings, let us assume that the amount deposited in the bank account is 10,000 Riyals and the inflation rate is 1% per year. The real value of the deposited money will decrease by 1% or 100 Riyals after a year. This means that the 10000 Riyals will have the same purchasing power of 9900 Riyals at the beginning of the year. Although 100 of 10000 Riyals is not that much but the effect of inflation will be more noticeable and effective by time.

Overcoming Inflation

If the investor leaves his/her money in the bank account, then the purchasing power of it will decrease by time as a result of inflation. But if it was invested then the investor is expected to gain capital profits and additional income that would strengthen his/her purchasing power. For example, if the inflation rate was 1% then the investor should achieve a return on the investment not less than 1%. If the investor was able to achieve more than 1% return then the inflation problem is solved and the positive return on investment would help in a better income in the future. Any investor should know that his/her investment portfolio consists of a group of owned investments in the portfolio and should choose investments, when taking the decision to add new investments, which achieve more than the inflation rate.

Capital Accumulation 

When an individual saves money, time is his/her enemy because inflation and the continuous increase in the value of commodities and services shrink the purchasing power of his/her savings. When the savings are invested, time will be a friend of the investor because it will allow an increase in the return of investment which allows the investor to buy more shares or portfolio units. Every time the individual reinvests surplus revenue and income then accumulated growth in his/her capital is achieved. By that, a simple investment can double in time to a large one.

How does capital accumulation happen?

To explain this, lets assume that 10,000 Riyals were invested in some shares and the average return on investment is  9% every year (of course there is no guarantee that the investment would have a return of 9% every year but just for the purpose of this example we will assume that. In reality, the return would change every year).

The investment in this case will have a return of 900 riyals. If this return was added to the original investment and was reinvested then the investor would have 10,900 Riyals invested next year. The new amount would be 981 Riyals the second year assuming the ROI is 9%. If the returns are reinvested with its capital for a third year, the capital would be 11881 Riyals and so on.

It should be noticed that in the previous example, the investor can double the investment in accumulative and fast way by reinvesting the return on investment with the original capital. This is the meaning of Capital Accumulation.

Reinvesting profits

Accumulated profits are considered the most effective kind of investments especially when the investor has the ability to reinvest all the profits from one year to the other.

Dividends

Sometimes companies distribute some of its profits on its shareholders and this is called distributing dividends. Usually a company announces its dividends in its quarterly financial statements. It is upon the company’s Board of directors to decide to distribute dividends or not and how much to distribute. Dividends are usually cash or as additional shares, in other words, dividends are the income investors get when buying shares or part of what is called the return on investment. The investor should understand that dividends are not always guaranteed and cannot depend on it alone as the company’s revenues might change from one year to the other which means dividends would change dependently. A company might also never distribute dividends if there is a slowdown in its business or it decides to reinvest its profits.

Dividends effect on the share value

Dividends directly affect the share prices. When dividends are increased, it is a clue that the company is blooming which could lead to an increase on the demand on its shares by eager investors. As a result, the share price will increase. On the other hand, when dividends are less, investors would figure out that the company does not have a bright future which would consequently lead to a decrease in its share price.