As you operate your pottery business, there might be times when cash flow is good and other times where it’s slow. In order to have a steady, reliable cash flow, an artist should invest those extra funds. Once the investments start generating cash flow, you can use this money to stabilize your business. These funds can also be used for studio or business expansion or retirement income. Let’s go through investments in detail.
Investing is about allocating your excess money with the expectation of a positive benefit/return in the future. The term investment implies maintaining an asset with the intent of generating extra income from the appreciation of your investment. Making investments can be intimidating as there are a lot of options for investing funds. It’s vital to weigh all types of investments carefully. Investments are mainly placed into three major categories: stocks, bonds, and cash equivalents. And, there are many different types of investments within each category. Note: We won’t be discussing cash equivalents—money markets, certificates of deposit, or savings accounts—as those types of investment accounts are less about growing your money and more about keeping it safe.
Buying/investing in stocks means you have a specific percentage of shares of a particular corporation, meaning you are a stakeholder in that company. Stocks represent ownership shares, also known as equity shares. Whether you make or lose money on a stock depends on the success or failure of the company, the type of stock you own, overall conditions of the stock market, and other factors influencing the market. Investors can make money when the value of the stock they own rises, and when they sell this stock, they earn a profit. Some shares also pay dividends, which are regular distributions of a company’s earnings to investors.
Buying/investing in bonds means you are lending your funds to a corporation, government, federal agency, or other organization in exchange for interest payments over a specified term plus repayment of principal at the bond’s maturity date. Companies issue corporate bonds, whereas local governments issue municipal bonds. The US Treasury issues Treasury bonds, notes, and bills which are debt instruments that investors buy.
Bonds are fixed-income investments because investors expect regular income payments. Interest is paid in regular installments to investors—quarterly or annually—and the total principal is paid off at the bond’s maturity date. Bonds are a lower risk than stocks, but they may also offer lower returns.
Investment funds pool money from multiple investors and invest by applying a specific strategy. Funds come in various types, each with differing features. Usually, publicly offered funds—mutual funds, exchange-traded funds, closed-end funds, and unit-investment trusts—must be registered with the Securities and Exchange Commission (SEC) as investment companies. Private investment funds called hedge funds are exempt from registration.
As with any security, investment involves risk, including the possibility that you may lose money. Past performance of a fund does not indicate its future performance. Some funds, such as hedge funds, do not register their shares with the SEC, which means they are not subject to the same regulatory standards that apply to mutual funds and other funds registered with the SEC. Types of investment funds include:
• Mutual Funds. The idea of picking the right stocks and bonds might be new and overwhelming to you. You are not alone. The artist’s mind is already occupied with its creative imagination plus operating business/studio so, mutual funds can be the best bet for an artist. Mutual funds allow investors to purchase a large number of investments in a single transaction. A professionally trained manager is then employed to invest your money in stocks, bonds, or other assets. Funds follow specific strategies created by the fund manager investing in the combination of stocks and bonds. They carry less risk as your money is more diversified. Some funds invest in both stocks and bonds.
The risk of the mutual fund will depend on the investments within the fund. When a mutual fund earns money—for example, through stock dividends or bond interest—it distributes a proportion of that to investors. When investments in the fund increase in value, the fund price increases, which means you could sell it for a profit. There is an annual fee, called an expense ratio, to invest in a mutual fund.
• Index Funds. Similar to mutual funds, index funds are one of the types of stock investments that diversify your investment across multiple stocks. The index funds are passively managed and not directly overseen by a fund manager.
As index funds are passively managed, fewer fees are involved, which means you have the potential for slightly higher returns than with a mutual fund. However, your returns will be based entirely on how well the index your fund is tracking does.
Index funds may earn dividends or interest. These funds may also go up in value when the benchmark indexes they track go up in value; investors can then sell their share in the fund for a profit. Index funds also charge expense ratios, but as noted above, these costs tend to be lower than mutual fund fees.
• Exchange-Traded Funds (ETF). ETFs are a type of index fund. They track a benchmark index and mirror its performance. Like a mutual fund, an ETF is a pooled investment fund that offers an interest in a professionally managed, diversified portfolio of investments. But unlike mutual funds, ETF shares trade like stocks on stock exchanges and can be bought or sold throughout the trading day at fluctuating prices. As with a mutual fund and an index fund, your hope as an investor is that the fund will increase in value, and you’ll be able to sell it for a profit. ETFs may also pay out dividends and interest to investors.
Options are contracts that give the buyer the right to buy or sell a security at a fixed price within a specific period without any obligation, such as a stock or exchange-traded fund. Purchasing an option means you’re buying the contract, not the shares themselves. Options can help investors manage risk, but buying and selling options also involves risk, and it is possible to lose money.
Options can be complex for the first-time investor. With options, you are locking in the price of a stock you expect to increase in value. If the value of the stock increases more than your purchasing rate, then you earn profit.
A good rule of thumb as a novice is, if you’re investing a lot of money into it but not getting anything out of it other than a bunch of debt, it’s a bad investment. Remember this includes expensive cars, fancy interiors, and other items that decrease in value over the period you own them. Avoid these typical leisure traps, so you have more money for the investment now and in the future.
Every artist’s risk endurance is different; you have to decide which investment types suit your lifestyle, timeline, and goals. I am not a financial advisor, but here’s what I suggest you do:
- First, open a Roth IRA and invest for retirement so your money grows tax free.
- Second, if you just want to invest your funds, do a little research, then put a chunk of it into an index fund.
- Third, invest in the stock market.
If you’re serious about investing, find a financial advisor to guide you.
Mamta Gholap, a frequent contributor to Pottery Making Illustrated, earned her MBA in finance, and is passionate about handbuilding with clay.