Securing our money is a must. This is the most effective and recommended way for us to grow and use it for more purposes. Also, investing leads to greater destinations in terms of finance as it empowers money growth and expansion. Now, for us to understand more fully the concept of investing, we need to know the following things.
Investing refers to the act of resource allocation, which is usually money. Here, we expect income-generating returns as we use our funds to empower and expand our investments. Also, we can invest in different endeavors such as businesses, assets, real estate, stocks and trades, and so many more. The principle of it, after all, is to help us grow our money from little to huge digits.
- There are two faces in the field of investments: the risk and return that can be compared to a flipped coin. The first face is called low risk, which simply refers to the low returns as expected from the investments, while the other side is called high risk, which is brought by high returns.
- Return and risk expectations can come in various forms as long as it is within the same class of assets: the blue-chip trading on NYSE and the micro-cap that works the trade through an over-the-counter transaction and generates risk-return profiles.
Moving forward, let us continue to the different types of investments for us to understand them thoroughly.
Types of Investments
Investing is a well-known field for its various and vast scope; however, we are going to discuss only the most common and used types.
Here, we buy the stock of our chosen company, making us a fractional owner of it. We are also called shareholders who have the privilege to act for the company’s general success and growth throughout the time. We can benefit from appreciating stock prices and regular dividends being paid out by the profits of the company.
Bonds refer to the entities’ debt obligations, such as municipalities, corporations, and the government. Once we have bought the bonds, we’ll then imply that we have a hold of an entity’s debt and this will allow us to receive periodical interest payments and a refund of the bonds’ face value once matured.
Funds refer to the pooled instruments under the management of investment managers who have the right to enable investors to invest in bonds, commodities, stocks, preferred shares, and others. Now, two of the most common fund types are exchange-traded and mutual funds. The difference between these two is that ETFs are being traded on stock exchanges and constantly valued like stocks throughout the trading period. On the other hand, mutual funds are not traded during an exchange yet valued. Both these two can track indices passively, such as the Dow Jones Industrial Average and S&P 500, or be managed by fund managers actively.
Next type, we have the investment trusts that refer to another pooled investment type having Real Estate Investment Trust as its most famous category. REITs are being invested in residential or commercial properties and then paid by regular distributors to the investors from received rental income out of the property. Also, it can trade on stock exchanges, making it capable of offering the investors lots of advantages regarding liquidity.
Following that, we have the alternative investments, which is regarded as the catch-all category as it includes private equity and hedge funds. Private equity refers to the privilege of companies to raise capital without doing any publicity movements. On the other hand, hedge funds refer to investment bets wherein investors are either short or long on investments and other stocks. Now, both private equity and hedge funds are available typically to affluent investors who are also called accredited investors as they have met certain net worth and income requirements. Recently, this type of investment was introduced in a much more accessible fund format for retail investors.
Options and Derivatives
Lastly, we have the options and derivatives wherein options refer to the popular derivate that provides rights rather than an obligation to us as buyers whether we are going to buy or sell a fixed priced security under a period. On the other hand, derivatives refer to the financial instruments that gain value from other instruments such as index or stocks.
Now that we’re aware of investing, we can have the chance to make a shot in this field.