Although we commonly categorise investments into stocks, bonds, and mutual funds, it is perhaps easier to first, know what is and is not an investment, and second, consider alternative ways of investing and grouping investment types together.
So what isn’t an investment?
People often say that the best investment one can make these days is an education: you put money into your own skills and knowledge in the form of tuition, and the returns one receive after graduation come in the form of wages earned from the skills that have made you employable in the first place.
But while that might certainly be the case, it must be made clear that consumer goods such as clothes, MP3s, and the latest Playstation can’t be considered investments, because these are items that naturally depreciate with use and time. It is important, after all, to note the difference between an investment and a purchase: a purchase doesn’t give you money over time, while an investment very well might.
Three categories of investment
The first category of investment falls under ownership. Ownership investments are considered to be the most volatile and profitable type of investment. And they are, of course, something you own that is expected to increase in value. They include:
● Stocks: also known as an equity or a share, a stock is a certificate that entitles you to a portion of a company and its profits. How this profit is realised is dependent on how the market values your stock: if you own shares in a company that has been performing very well, other investors will want to purchase shares in that company as well. Their demand for the shares will drive up the price of the shares, increasing your profit if you choose to sell the shares.
● Business: putting money, as well as time and effort towards starting your own business is a kind of ownership investment, as long as it aims to provide a service or product that creates a profit.
● Real estate: apart from the home you own (which fulfills the basic need for shelter), any other properties which you choose to buy, rent, repair, and/or resell is a form of ownership investment.
● Precious objects: Precious goods such as gold, artwork, limited editions of items and collectibles can be considered an investment if the aim is to resell them for profit. They can be considered a risky investment, however, since damages to such goods might cause them to depreciate; storage and maintenance costs for these goods might further cut into the profit you make.
The second category of investment falls under lending. These types of investment involve lending your money, with the expectation that your returns arrive in the form of interest rates. This means that although the money you make is relatively little compared to ownership investments, the money you possess and receive remains relatively safe and stable.
● Bonds: a large, catch-all term for any type of debt investment, buying a bond entails loaning money to an entity, corporation, or government that pays you back over a set period of time with a fixed interest rate. They are also known as fixed-income securities, and are attractive for their relative safety and freedom from risk.
● Your savings account: when all is lost and you have nothing left but your savings, you are still considered an investor. Putting your money in a savings account is technically equivalent to lending it your money to loan to others - but the returns from this kind of investment are pitiful and negligible.
The third category of investment is known as cash equivalents, for these investments can be easily converted back to cash. Not many people use these kinds of investments, however, for they give little returns without any of the safety or risk-freeness that come with bonds. Cash equivalent investments include mutual funds, traveller’s checks, and money market funds.
Written by : Daryl - He believes that the most important factor leading to success is planning. He is interested in investing. When he’s not learning more about how to grow his savings., he’s writing for ShopBack.