What is Principal Investing and How Can Fintalent’s Principal Investing Consultants Support You?
Before jumping into the ins and outs of principal investing, it makes sense to define exactly what an investment is. According to Investopedia.com, an investment is “the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.” So basically, investing involves taking some cash (or other asset) and putting it somewhere where you believe you’ll get more back in the future than what you invested in the first place.
While investing isn’t rocket science, it can still be a bit of a brain teaser for some people. To make things easier, let’s break down the definitions of an investment into subcategories.
- Stocks are shares in a company that are bought and sold with the intention of making money through rising prices. Stocks are essentially shares in businesses, but most investors do not own actual shares in companies themselves—they own stock certificates which represent their ownership share in the company. Each stock has its own value based on supply and demand (i.e., how many people want to buy them at any given time).
- Bonds are similar to stocks in that they represent an ownership share in a company. However, unlike with stocks, you’re not buying and selling your bond certificates—you’re just borrowing money from a bank or other financial institution and investing it in their holdings of bonds. Banks and other lenders require that the money be invested in government securities such as bonds which pay interest after a certain number of years (typically ten years).
- Real estate is also considered an investment because it is bought and sold with the intention of making money through rising prices. However, unlike stocks and bonds, real estate deals involve owning ownership shares instead of ownership certificates—which makes real estate a more challenging investment to execute successfully.
These are the basic definitions of an investment, but before we get into how principal investing differs from other types of investments there are a few other things worth pointing out.
The first is that every investment entails some risk. Stocks lose value over time, people can invest in bad real estate deals that never pan out, and any number of things could go wrong with your investments. But the good news is that investments are tax-efficient—you won’t have to pay taxes on what you don’t earn. The same is true for principal investing—the only thing you’ll have to worry about when investing with PICs is paying capital gains taxes on profits if and when they come in after the fact.
The second is that while most investments carry some risk, some are just plain more risky than others. Things like investing in foreign real estate can create a lot of headaches. While principal investing doesn’t carry any risk on the back end, it does carry on the front end. It’s something to consider if you have little or no experience with investing before deciding whether or not to get involved.
Principal and traditional investment methods: Why principal investing is different
There are two main types of investment: principal and traditional (also called passive) investments. Contrary to popular belief, principal investing doesn’t necessarily mean that you must be the one doing all of the invested capital work yourself. What it means is that you’re taking money from investors and using it to make other investments for them.
Traditional investments are different because traditional investors are the ones making their own investments with their own money. However, while many individual investors make traditional investments on their own, this isn’t always the case. Some individuals choose to invest through mutual funds while others invest through exchange-traded funds (ETFs), index funds or hedge funds—all of which are types of traditional investment vehicles that invest other people’s money in various ways.
Principal investing is completely different because it involves getting other people to invest their own money in your investment vehicle. Principal investing is a type of investing that relies on the principle that by holding onto an asset for a long time it will eventually increase in value and become worth considerably more than its initial price. The key to successful principal investing is to find an investment with a high probability of increase over a long period of time. If the value of the asset increases as expected, then the investor will make a profit as it can be sold for more than the purchase price. Here’s how things break down:
Traditional passive investment: You take money from other investors and invest it based on your own credit. This means that you’re taking their money and investing it for yourself.
You take money from other investors and invest it based on your own credit. This means that you’re taking their money and investing it for yourself. Principal investing: You take other investors’ money and invest it for them.
What’s the difference, you ask? If you already have the money to invest yourself, then principal investing is a piece of cake. However, if you can’t come up with the cash on your own, traditional passive investment is the way to go as it allows you to invest other people’s funds in a tax-advantaged manner. In principal investing, however, you’re taking their money and putting it back into your own investments to begin with—and this means that you’re going to have less taxable income from profits potentially coming in from those investments because there will be no capital gains taxes to pay out.
The main takeaway here is that while both principal and traditional investing can provide you with great returns in the short term, only traditional investing offers tax advantages to investors. You can use this in your favor when you’re deciding where to invest—and what type of principal investing opportunities to pursue.
Principal investing is all about the future
While becoming a principal investor doesn’t mean that you have to be an actual investor yourself, many people are happy with their traditional investments and don’t see the need for becoming a principal investor. In principal investing, however, you’re going to be responsible for the entire investment being made—and all of the risks that come with it. And while most traditional investments have a fixed timeline attached to them that you must watch very closely, principal investing doesn’t have a fixed timeline. You don’t have a set number of years in which you’ll need to make investments or when you can expect returns on your capital.
What’s more, while most people invest in stocks and bonds for their potential to gain value on the back end (in other words, stock and bond prices go up over time), principal investing is about waiting for gains (or losses) to occur on the front end—hence its name. Principals are in the business of investing for the future in order to come out ahead in the long-term. This means that you’ll be managing your investments carefully, keeping an eye on the markets and keeping tabs on when to invest, when not to invest and what investments might be worth pursuing.
As with traditional investing, there are no set rules when it comes to managing your principal investments. You can buy whatever you want with them—and you can buy or sell these things whenever you please. You can keep up with investment news which will help you know when it’s best to invest or hold off until market conditions improve.
Principal investors don’t have it easy
The bottom line is that while principal investing can be a great way to invest other people’s money and gain on the front end, it doesn’t mean that you won’t have to put in any work. You still have to manage your investments in the same way that you would manage them if you were actually the one investing your own capital. You’ll need to be constantly aware of market conditions in order to make educated bets on when you should invest or hold off until market prices improve.
At the same time, you’re not going to be able to make returns on money invested without taking risks. You’ll have to think about the risk-to-reward ratio of any potential investment—and whether or not it’s worth taking a chance on.
No matter how you look at it, principal investing is a major undertaking. If you want to become a principal investor, you need to know that it can be an intense process that requires much attention and constant monitoring over short periods of time. It’s not something that can simply be done overnight—and if you’re serious about getting into this type of investing, then expect to put in much more work than what’s required by traditional investing methods.
Principal investments: The pros and cons
The biggest benefit of principal investing is that it can be a great way to make money for your future. You’ll be able to make the most of the tax advantages that come with these types of investments—and you can reap the rewards at a later date. However, you’re going to have to put in serious work in order to invest this way, and it’s likely not going to be easy or quick. You’re going to have to closely monitor markets and markets around the world so that you can pick up on trends and build a keen understanding of how this affects any potential investment decisions you may need to make down the line.
And while there are no set rules in terms of when you can make these investments, it’s in your best interest to invest in the future when you can rather than in the present—and that can be a tough line to walk when you’re trying to gauge risk and reward ratios.
Why Your Business Needs Fintalent’s Principal Investing Consultants
When it comes right down to it, principal investors have to work hard in order to make returns on money invested. They monitor markets to ensure they are aware of what’s going on related to potential investments. They calculate and decide on risks to take in order to reap rewards for their clients. Without any set rules attached, principal investing is a very daunting task that requires much work. A lot of the burden of deciding on what to invest in can be taken off the shoulders of business managers when they hire Fintalent’s Freelance Principal Investing Consultants. Fintalent’s Principal Investing Experts have a wide variety of experience in Financial Analysis and Investment Management and would help drive the profit seeking motive of investors.