What is Investment and Its Types?
Investment is a word that is used as a noun, verb, or adjective. Its meaning can differ depending on the context in which it is used.
An investment is something that is put into an asset, with the hope of future financial gain. It is also a process where the investor puts money into an asset for an uncertain period of time for a return in the form of interest payments or price appreciation during this period. This process can include taking out money from said asset before its expiration date to mitigate losses or purchase other assets with different expected returns and holding them until expiration date comes to pass when you are assured of getting your original investment back..
Your savings become investments when you deposit them, or have them deposited by someone else, into an account with a financial institution. This is a process that involves banks and financial institutions. Your initial deposit becomes an asset on the bank’s balance sheet, and the bank agrees to pay you an agreed-upon rate of interest on this money for a specific period of time. The bank may redeem your investment before that time is up; usually with payment of some additional fee or interest rate penalty if the institution needs to use your money for its own purposes.
Mutual funds – A fund is created by an organization (mutual fund) that is regulated as a financial institution. The mutual fund manager typically invests the fund’s assets in securities, such as stocks, bonds or other forms of investments that are tradeable and suitable for investment. Their goal is to generate positive return for their investors over the long-term by investing in a diverse portfolio of securities that are appropriate for their size and risk level. Investors can buy shares from the open market or from a broker; either way, they pay whatever price the market sets at the time of purchase. The value of shares declines when an investor sells it, or may increase if they buy more shares to offset losses in earlier sales).
Individual securities – An individual security is an asset, such as a stock or bond, that is issued by a company. The owner of this asset has the right to buy more shares at any time during the term of the security (the “life” of the issue), and to sell them to others. Individual securities are generally issued in units called certificates. Ownership in an individual security transfers from one person to another at the time that the ownership transfer is recorded on a company’s books and records. They are typically bought and sold through registered broker-dealers or through financial institutions where investors could buy or sell the certificates or their underlying investment.
Types of Investments
The time horizon of the investment is an important consideration in the selection of a particular investment. The longer term an investment takes to reach its peak and fall, the greater the opportunity for fluctuation in value.
The longer an investment’s time horizon, the greater the potential for gains due to compounding.
The longer a person dwells on how long their investments will last and how little interest they will receive every day, they are prone to be disappointed when their investments do not perform as hoped. It is even possible for investments with a short-term outlook to go down in value more so than those with a long-term outlook because people tend to feel more comfortable about them based on their low potential for losing value.
Investments are typically classified into two categories: cash and securities. Cash is considered safer than securities because cash cannot default on its debts unlike stocks or bonds. Stocks and bonds offer a return, but no risk of loss to the investor. Municipal bonds offer a lower return rate, but these are backed by the government so there is little risk that they will default on their debts.
Cash can be used for daily living expenses, whereas stocks and bonds can only be used as an investment vehicle for diversifying one’s portfolio by investing in various types of assets such as debt obligations (bonds), corporate and commercial paper (stocks), commodities (commodities) or real estate (real estate).
Finance companies, banks, credit unions and other financial institutions offer a variety of investment products that are usually termed “investment vehicles”. These may range from money market accounts to mutual funds to individual stocks, bonds or other securities. The common feature of these investment vehicles is that they offer a variety of risk profiles with varying degrees of return and risk.
Educational institutions, as well as commercial organizations and government agencies, also invest in the form of endowments and foundations. These are considered to be long-term investments that often involve significant research into the best possible use for the endowment funds by an appointed committee set up for the purpose.