Defining The Different Types Of Investments For You To Make A Better Choice
When you want to invest in bonds, stocks, shares, debentures, real estate or even in a borrower one thing that you essentially require is proper knowledge about the instrument that you want to invest in.
Most of the people have a very vague idea about the "investment" which due to overuse has become somewhat muddled to confuse people who want to invest. Moreover, you will come across nine people out of ten who will refer to a bond or a stock as an investment. This is a common practice though mot a misconception.
However, in these days the word “investment” has several other meanings and purpose and now you can make investment in education, housing, cars, consumer durables and a whole range of other diverse areas.
Even in this regards, there are a few things that are definitely not investments much opposing to the strong advertisements of these items through the commercials. According to the critics and financial experts there is a lot of difference between actual investment and a debt investment. It is certainly not what the dictionary says especially when you want to invest in debt instruments. It is not only something that is purchased with and for money expecting it to produce a profit or income.
The ownership investment
Ideally, investments can be divided into three basic groups such as ownership, lending and cash equivalents.
Ownership investments are the most common one that comes to the minds of people who want to make an investment. These types of investments are most volatile and profitable. There are a few subgroups of ownership investments such as:
- Stocks: Literally, stock is a certificate that certifies that you own a portion of the company which has issued it. If you look at its broad types you will see that it includes all traded securities right from the currency swaps to the futures. You will simply own a contract when you buy one of these ownership investments and have a right to a part of the value of the company or have the right to pass a judgment or perform an action as in a futures contract. However, the profit that you will realize from your stock will depend on the market value of the stock that you own. If the demand of the shares is high it will increase the price and value of your share thereby increasing your profit provided you choose to sell your shares.
- Business: You may also invest your money into a running business or for starting a business. This type of investment called entrepreneurship is one of the hardest investments to make. This is because it needs lot more than just money. Apart from that, this is also a specific ownership investment that has a potential of extremely high returns. There are a lot of people all over the world who have created a product or a service and have sold these to people who need it eventually making a huge personal fortune. Though they may have had occasional initial hiccups in the start, proper planning, management of business and finance, debt and credit has helped them to achieve what they want. Ideally, investing in a small business to create wealth and clear your debt is a far better way than looking at com for debt relief. Investing in business and doing well will not affect your credit score in an adverse manner.
- Real Estate: This is another useful and high yielding area wherein you can invest your money. It involves houses, condos, apartments or any other dwellings even student housing. Making an investment in these means that you either buy a property to rent it out later or repair it to resell it. This investment does not include the house you are living in as that is fulfilling your basic need. However, the value of the property will appreciate over time but since it is not bought for the purpose of earning money in whatsoever way, it will not be considered as an investment.
- Precious objects: You can also invest on different collectibles and precious object to own such as gold and jewelry, Da Vinci paintings and others. These will be considered as an ownership investment only when these are owned with the intention of reselling these for a profit.
However, investing in precious objects and instruments may not be considered as a good investment and there are a number of reasons for this. It has the risk of physical damage and depreciation, loss or theft and requires proper upkeep and storage thereby increasing costs on a recurring basis and eats up your eventual profits.
Concept of lending investments
When you make a lending investment you literally become a bank. However, these types of investments are of lower risk and therefore are less yielding as compared to the ownership investments.
- A bond issued by any company will pay a specific amount after a certain period. However, in reality the company may earn double or triple in value above and beyond the value of the bond but it can also lose heavily and even go bankrupt. In such a situation, the bondholders still get back their money but the stockholder gets nothing.
- Even if you have a regular savings account and nothing else you can call it as your investment. This is because you are lending your money to the bank that uses your money to lend it somewhere else on interest. What you get in return is a specific amount as interest which is a share of the earning of the bank. Though the return is very low in this type of investment but the risk factor is practically nil thanks to the Federal Deposit Insurance Corporation.
You can also invest in bonds that include a wide variety of investments from Treasuries, international debt, corporate junk bond and credit default swaps.
Apart from that, you can also invest in another subgroup of ownership investments that are called cash equivalents that are easy to convert into cash. These include money market funds that have low rate but also very low risk.