Types of Investments
Types of Investments
We will be laconic in this chapter about investments, because more or less all this website is about investments.
But let’s mention the types of investments:
Stocks are equity securities that can bring return in two ways: dividends or capital gains. Stock is one asset class but in reality risk and return of stocks may differ widely, for example growth stocks or value stocks. Investing in stocks is risky (because you never know what the return will be), but if used wisely, stocks are great investments and may bring the best returns over long investing period.
Bonds are fixed income securities, and it is always known what investor may expect from bond investment. The return from bond is represented as ‘yield to maturity’ and gives estimation about the potential return until the bond will be redeemed. The default of the bond also may happen, and actually it is the worst thing that may happen to bonds (the default doesn’t mean that investor will lose whole invested amount, but some losses will inevitable). Almost all larger bond issues have some rating which represents the risk as it sees rating agency.
Money market investments are similar to bonds. In their meaning they are the same, but it is common that bonds represent long term fixed income securities while money market instrument are only short term. It is very safe investment over short period, but usually it offers very low yield, which in many cases may not even cover the inflation. So normally, money market investments should be included in an investment portfolio only for short term tactic actions.
Real estate is known to everybody. According to its risk-return level real estate investments are somewhere in between of stocks and bonds. Or some low risk sectors stock investments should match real estate. Real estate investments aren’t bad investments but they are harder to be acquired directly by retail investors because larger funds are needed. Real estate investing usually is separated from investment in securities.
Investment funds as mutual funds, index funds, ETFs, private equity funds, hedge funds or other funds actually do not represent real asset class. All the funds are consisted of other investments that are mentioned here. The only difference that fund is a diversified portfolio of investments and is more consumers friendly to invest in (of course, takes charges for that). There are many types of investment funds, and investment strategy of the fund determines what investments the fund may choose.
Derivatives are financial instrument that are based on other investment prices. The variety of derivatives is extremely large (from options to structured bonds) and it is no meaning to mention them all. The thing is that derivatives are totally unnecessary investment for beginners.
Other investments are also possible. Some collectables or other yielding or non-yielding but appreciating in value over time assets also may be treated as investments, but such types of investments aren’t classical and require separate analysis and presentation.