Types of Investments
What is Investment? Simply stated, the investment is a noun that describes an activity or course of action intended to generate income. For example, to make an investment is to commit money with the hope of a return/profit in the future. Simply put, to make an investment implies having an asset or an object with the intention of generating a profit or an income from the investment over a specified period of time, typically years. The income obtained from an investment may be termed capital or profits.
One type of such activity is referred to as fixed or growing and includes raw land, fixed assets like plant and machinery, and accounts receivable. Fixed income is similar to the word in that it indicates an asset that is expected to provide income for the holder for a specified period of time, usually years. The most common form of fixed income in modern times is corporate bonds. These are typically traded on exchanges such as the New York Stock Exchange and are purchased by large institutional investors. Examples of fixed income investments are corporate bonds, municipal bonds, interest-bearing deposits, and treasury bills.
Another common form of investment is equities. It is the safest way to earn returns on investments; however, it is also the most volatile. Examples of equities include stocks, commercial papers, mutual funds, mortgage-backed securities, and the traded penny stocks. These investments are normally made by institutional and wealthy investors. The downside to equities is that they are difficult to sell after a decline in price. Institutional investors usually buy large amounts of shares of a company at a time when it is making progress in producing profits to raise the funds required to purchase them, in order to cover their initial investments.
The last major type of investment is the money market funds. Unlike other investments, money market funds are designed to be interest only. Money market funds have low costs but are diversified across many different financial portfolios. Typical assets included in a money market fund are savings accounts, certificates of deposit, and sometimes CDs (certificates of deposit) or even bond funds.
One of the newest types of investments available to consumers are penny stocks. Similar to mutual funds, penny stocks are also a popular choice for high-risk investors. Examples of penny stocks are companies that are beginning to hold greater than $5 per share in value. The downside to penny stock investments is that they are very risky because there are not enough experienced investors to help keep a check on a company’s expansion.
One of the oldest yet still prominent types of investment is bond investments. Bond investments are meant to offer long-term stability and should not be used as a method to make money quickly. Many governments issue bonds as a way to finance public works and projects, in which case, the bond is seen as an expense to the government. Bonds are typically traded on major stock exchanges such as the New York Stock Exchange and the NASDAQ. While they offer security and can usually be purchased at a low cost, they also come with high commissions that can make it difficult to make money with these types of stocks.