An investment is simply money committed (money set aside) or property acquired with the hope that it will generate future income. This article is set to explain the types of investments there is.
There are three major types of financial investments. Any kind of investment you make falls into one of these categories. They are; ownership investments, lending investments and cash investments. Keep in mind also that not everything you spend money on is an investment. For example, a car you bought for yourself is not an investment. Why? Because as you use it, it’s value depreciates and as such you may not sell it at a higher price than what you bought it for. The true test of an investment is that it is supposed to generate more money than what it cost.
Types of Investments # Ownership investments
This type of investments stand to be the most unstable and yet most profitable type of investment. The types of ownership investments include;
- Stocks/ Shares: Simply put, a stock is a part of a company; could be a small part or a significantly large part. Stocks are your claim to ownership of a portion of one or more companies. The major difference between stocks and shares is that; while stocks refers to all the stakes you have in many different companies, shares refer to the stakes you have in a particular company.
- Business: Entrepreneurship is also an investment. It is so because you use money to start it up with the hope that you would make profit. It is also one of the most difficult because it involves you bearing the risks and burdens of running a business. Keep in mind that there are also types of business investments, it would largely depend on the kind of business you choose to invest in and how you go about it.
- Real Estate: Real estate are basically houses or property you buy to renovate, rent out or resell at a price higher than what you bought it for. The house you live in however does not count as an investment because it is satisfying one of your basic needs which is shelter.
- Valuable Objects or Artefacts: There are certain historical objects that have immense monetary value. An example of one of such would be a Da Vinci, Michelangelo or Picasso painting. Jewellery that belonged to a historical figure is also valuable. The downsides of making these kind of investments are that they are at risk of physical depreciation and as such would demand you to spend on their storage and upkeep.
Types of Investments # Lending Investments
These type of investments come with very minimal risks and as a result offer less returns.
- A savings account: When you open an account with a bank, you are lending them your money to use as they deem fit. Nonetheless, the returns you will get are very small, the risks involved are equally small.
- Bonds: Bond is a collective term for a range of investments, from treasuries and international debt issues to corporate junk bonds. The risks involved would depend on the particular type of bond you chose to invest in, but still, the risk would be minimal as is most often seen with lending investments.
Types of investments # Cash Equivalents
Simply put, these are investments that can be very easily converted back to cash.
- Money Market Funds: This is one of the most liquid investments i.e. you can write checks out of a money market account that same way you would a checking account. The return on this kind of investment is however small the same way the risks are small.
Anything that does not fall into any of the categories stated above does not qualify to be called an investment. An investment should bring in more money than it took out. So if you are wondering how and where to invest, make sure that whatever you settle for is not in actual fact, a liability. And do well to avoid any mistakes.