Different Types of Investments
Investment refers to a systematic process of creating a financial value by creating something out of nothing. To invest is also to put money in the hope of some return in the near future. While the two terms are often used interchangeably, there are many differences between them. Understanding these differences and which one is most appropriate for you can help you make better financial decisions.
For example, a bond generally represents an investment in fixed interest securities. Bonds earn interest, which is their sole purpose. They are not designed to generate income. Bond investing is a conservative strategy that relies on a low risk level and long term stability to provide a secure source of income. This type of investment is primarily interest-bearing and is usually safe because the issuer has the legal right to repossess in the event of inability to repay.
When an investor invests in stocks, bonds or mutual funds, the principal amount of the investment is used as collateral. The money invested by the investors in stocks, bonds or mutual funds is returned to them in the form of dividends. While this provides a steady monthly income, it is important to remember that dividends offer lower returns than other types of investments.
Real estate investments use the purchase of property to create a security and hold it until it is sold. Properties include apartments, townhouses, condos and private residences. Since real estate prices tend to appreciate over time, many investors prefer to purchase properties for the long term and hold onto them, earning dividends periodically.
Another type of investment is bonds, which are secured by a borrower’s collateral. Bond investing offers regular income with a risk of losing principal. Most bond investments are insured by the FDIC. This means that if the borrower defaults on the loan, the FDIC will cover the loss. Interest rates are regulated by the federal government, so investors make money when interest rates go up. When rates fall, investors lose money since bond prices usually fall as well.
Most people have some savings account with a checking account or money market account. These types of accounts are considered long-term investments because they are not designed to earn extra interest. Investments made in money markets and CDs earn less interest. Many people choose CDs to replace their traditional savings accounts because they provide higher interest rates and flexible terms. Some people who do not want to change their savings strategies also choose to invest in cash equivalents, such as cash funds and bonds.