Investments and the Investment Process

Most people are already investors. If they have any money in a savings account, that is already one investment they have. An investment is any vehicle in which funds can be placed with the expectation that it will generate positive income or increase value. Returns are received in two forms: current income and increased value. For example, a savings account provides current income through interest payments. Meanwhile, a share of common stock purchased as an investment is expected to increase in value from the time it’s purchased to the time it is sold. Cash by itself or a no-interest checking account is not considered an investment as it fails to generate any income or increase in value.

Investments and the Investment Process 1

Types of Investments

When you invest, the company or government entity you invest in offers an expected future benefit in exchange for your funds. These organizations compete for your funds. Investors will invest in the organization that they judge to be better than what the competitor offers. Different investors will judge benefits differently. Because of this, there are several types of investments available, from “sure bets” such as the interest earned in a savings account or CD, to the possibility of earning big returns fast by investing in some hot new stock. The investments you choose will depend on your goals, tolerance to risk, and resources.

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Securities/Property-Securities are investments that are debt, ownership, or the legal right to acquire or sell an ownership interest. Common types of securities are stocks, bonds, and options. The property, on the other hand, is an investment in real property or tangible personal property. Land and buildings are examples of real property. Examples of tangible property are gold, artwork, antiques, and other collectibles.

Direct/Indirect-When an investor directly acquires a claim on security or property, it is called a direct investment. This would be when you buy a stock or bond to earn income or expect it to increase in value. Indirect investment is when an investment is made in a collection of securities or properties. The purpose of this is to invest in a professionally managed collection of securities or properties.

Debt, Equity, or Derivative Securities-Investments are usually a debt or equity interest. Debt represents funds given in exchange for interest income and the loan’s promised repayment at a future date. Equity is the ongoing ownership of a business or property. It could be held as security or by title to a specific property. The most common type of equity security is common stock. Derivative securities are neither debt nor equity. They derive their value from an underlying security or asset. Options are an example: An investor buys the opportunity to sell or buy another security at a specified price during a given time period.

Low or High Risk-Sometimes investments are differentiated based on risk. Risk is the chance that actual investment returns will differ from those expected. The wider the range of possible returns or values of an investment, the greater the risk. Investors can choose from a wide variety of investments with varying degrees of risk. For example, stocks are considered riskier than bonds. However, you can also find high-risk bonds as well. Low-risk investments are considered safe, while high-risk investments are considered speculative. Speculation offers a high level of uncertain returns and future value. Because of the perceived greater risk, greater returns associated with it are expected.

Short or Long Term-Investments can be described as either short or long-term. Short term investments usually mature within one year, while long term investments are those with longer maturities or no maturity.

Domestic or Foreign-A couple of decades ago, U.S. investors almost exclusively invested in domestic investments: the debt, equity, and derivative securities of U.S.-based organizations. These days, investors also look for foreign investments that might offer better returns than just domestic investments. These days, information for these foreign organizations is more readily available, and it’s also easier to make foreign investments.