You may have heard the phrase, “If you want a good return, you need to invest.” But what does it mean to invest in something or someone? It is certainly true that the overall goal of investing in something is to generate greater value (income or appreciation) in the future than you have at the time of investment. There are many kinds of investments. An investment may come in the form of time, money, labor or other assets.
Financial investments may include the purchase of stocks, bonds, mutual funds, etfs, options, annuities, bank products and more. The purpose of these assets could be to provide future income, or simply greater future overall value. When the investor decides to sell their asset, they aim to produce a good ROI (Return on Investment).
Types of Investments (Financial)
There’s are many investment vehicles and asset classes for investors to choose from. Knowledge of the asset, risk level and tolerance are some things to consider before deciding to invest.
Growth investments are best for those who intend to hold on to their asset for longer time periods.
- Shares. These are equity investments that represent your interest in a company’s growth and success. As the company grows and makes money, so do you—be it through share price, dividend payments, or other means.
- Bonds. These are debt equities that represent a promissory note. The issuer agrees to pay you back your principal investment with a fixed rate of interest over a fixed term. This debt helps issuers finance new growth opportunities.
- Funds. Index funds, mutual funds and exchange-traded funds (ETFs) are all managed investments. You’re pooling your money with other investors and letting an expert leverage larger sums and expertise to generate ROI.
- REITs. Real estate investing without actually owning the real estate. REITs return 90% of their income to shareholders, which means strong compounding power through dividend reinvestment—or a passive revenue stream.
- Derivatives. Options and other derivatives allow investors to make money without holding assets. They’re a riskier form of investment with big upside for those who understand market tendencies and catalysts.
- Commodities. Everything from gold and silver to livestock and crops have intrinsic value. Investors in commodities capitalize on these values without owning the commodities themselves.
- Property. From rental houses to multifamily properties and commercial real estate, there’s wealth-generating power in property. Collecting rent passively, fix-and-flip sales, buy-and-hold appreciation and more are all forms of investing.
- Private equity. If you own a stake in a local business or fund a startup with an infusion of capital, you own private equity. This stake entitles you to a portion of the revenue or value of the asset.
There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
Once you are familiar with the different types of assets you can begin to think about piecing together a mix that would fit with your personal circumstances and risk tolerance.
These are more suitable for long term investors that are willing and able to withstand market ups and downs. These are high risk investments that have the largest potential gains. A lot of tech stocks are considered growth investments.
Shares are considered a growth investment as they can help grow the value of your original investment over the medium to long term.
If you own shares, you may also receive income from dividends, which are effectively a portion of a company’s profit paid out to its shareholders.
Of course, the value of shares may also fall below the price you pay for them. Prices can be volatile from day to day and shares are generally best suited to long term investors, who are comfortable withstanding these ups and downs.
Also known as equities, shares have historically delivered higher returns than other assets, shares are considered one of the riskiest types of investment.
Property is also considered as a growth investment because the price of houses and other properties can rise substantially over a medium to long term period.
However, just like shares, property can also fall in value and carries the risk of losses.
It is possible to invest directly by buying a property but also indirectly, through a property investment fund.
These are more focused on consistently generating income, rather than growth, and are considered lower risk than growth investments.
Cash investments include everyday bank accounts, high interest savings accounts and term deposits.
They typically carry the lowest potential returns of all the investment types.
While they offer no chance of capital growth, they can deliver regular income and can play an important role in protecting wealth and reducing risk in an investment portfolio.
The best known type of fixed interest investments are bonds, which are essentially when governments or companies borrow money from investors and pay them a rate of interest in return.
Bonds are also considered as a defensive investment, because they generally offer lower potential returns and lower levels of risk than shares or property.
They can also be sold relatively quickly, like cash, although it’s important to note that they are not without the risk of capital losses.
Cryptocurrency is another high risk investment, that many say will payoff in the long run. It’s founded on the idea that currency shouldn’t be centralized and controlled by anyone, be it individual, bank, or government. Anyone with internet access can get a piece of the pie.
This was just a brief overview of different types of investments. Please use our search function or check out related articles to dive deeper into each one of these topics.