Investment is allocating a certain amount of money to gain income, profit, or property in the future. It is purchasing an asset or property that is profitable and will generate income in the long run. Investing is a way of earning more money without having to work more hours. It is like making your money work for you, while you are working, too at the same time. You earn extra money even without getting an increase in salary, working overtime, or changing jobs.
If you are an individual, there are a lot of reasons you might consider to start investing. You might be allocating some money so you have something to spend for emergencies, securing yourself financially or preparing for both short-term and long-term financial needs of you and your family. Saving money is not enough and might not be a good help for you in the far future, price of goods increase constantly because of inflation so investing your money instead of saving is better for long-term purposes.
It might sound easy, and yes it kind of is, but it is not as simple as giving away your money and expect it to grow exponentially without even thinking about it. Investors still have to do analysis and research to make sure that there will be a profit before committing a capital. Not all things you can invest can guarantee a significant profit that can actually help you financially.
The main goal of investment is to let you earn more than you get from your job, and there are many ways of doing this. Here are the three different types of investment: ownership investments, lending investments, and cash equivalent investments.
As the name suggests, in this kind of investment, you own the asset and you expect its value to increase overtime. This is the type of investment which comes into people’s mind when they hear the word “investment”.
Stocks: Investing in stocks means owning a portion of a company. This means that you have a voice at the shareholder’s meetings, and the amount you gain depends on your shares in the company. If the business performs well and earns money from their products and services, then you can expect your money to grow.
There is a drawback in this kind of investment. Stocks are very unstable and you are not guaranteed anything when you purchase. Even so, it offers high potential profits, so you must be willing to take the risks of losing some or your entire share before buying stocks.
There are two possible sources of income when you invest in stocks. They are dividends and capital gains. Companies can opt to distribute their earnings to shareholders with dividends. Investors can choose to claim the dividends in cash or use them to buy more stocks. Capital gains, on the other hand, are the profits you get when you sell your stocks at a price higher than how much you paid for it.
Real Estate: Real estate investment is buying any real estate properties (lot, houses, apartment units, etc) then selling them or renting them out for profits. Any property you buy with an intention of earning money with it is a real estate investment. However, the house where you are living in is not an investment since it is fulfilling a basic need.
Investments of this kind are safe because the value of real estate properties appreciates overtime. It is assured that you can sell your property at a higher price than when you purchase it. Things to consider before buying properties are the quality of the materials used, structure of the building, and location to make sure that it will last for a long time.
Precious Objects: Anything valuable purchased with an intention of reselling for profit can be considered an investment. Things such as gold, jewelries, artworks (especially by renowned artists), signed albums by popular singers, sports equipment or sportswear signed by legendary athletes, etc. Like real estate properties, their values appreciate overtime but some factors might cause reduction to the final profit in the future. These kinds of objects are prone to physical damage if not stored properly so you must spend some amount to maintain its quality. You must take into account its costs when you are selling it to make sure you still gain.
Business: Another type of ownership investment is business investments. In this kind of investment, you are putting not only your money but also your time and effort to the business. You create, develop, run, and expand a business’ services, products, or products using your money and time with the hopes of earning a profit in the future.
This kind of investment is known to be much safer than ownership investment. They poses low risks but also, expect low return profit. In lending investments, you are like a bank; you buy a debt that is anticipated to be settled.
Bonds: Bond is actually a broad term referring to many kinds of investments. Here, you lend money to an institution and they pay you back with a certain amount of interest depending on when the contract dictates. There are two ways you make money through this investment: interest and capital gains. Usually, there is a fixed rate of interest for bonds, and that is where you get your income when they pay you back. And like in stocks, you can sell the bonds you bought before maturity at a higher price.
There are different types of bonds you can choose from the bond market place. They are corporate bonds, municipal bonds, agency bonds, and asset-backed securities. The main difference among these things is who issue the loan and what for, but aside from this, they work the same; you lend your money and you earn with the interest when they pay back.
Certificate of Deposit (CDs): This is a kind of savings bank account. Here you deposit your money as a time deposit, meaning you commit your money to the bank for a long time. Unlike in regular savings accounts, you are not allowed to withdraw your money unless until the contract says otherwise. Banks will offer you higher interest rates than savings account in this kind of investment, and the rate would depend on the period of time you are committing your money. The higher your deposit and the longer you commit it, the higher the interest the bank would offer you. But to avoid penalties, make sure you will not need your money before the term is up.
Technically, savings accounts are also lending investments. You deposit your money and then the bank loans it out, and then you get a return, Even so, many do not consider it a real investment since the interest is usually lower than the inflation rate.
Cash Equivalent Investments
Money Market Funds: This is a short-term, low-risk, low-reward type of investment. Since the return is relatively low, this is not an option of long-term investors aiming financial security in the future when they retire from their job. Another way to put it is that, money market funds are “as good as cash”. Technically, it is a type of lending investment, but because of its very low returns, it is considered a cash-equivalent investment. Money market funds can be purchased from mutual funds, brokerage firms and banks.
A mutual fund is a combination of investment of different investors investing in stocks, bonds, money market funds or any asset. It is organized by a money manager; he or she invests the capital with the hopes of gaining profit. Each shareholder gains or loses money proportional to their share in the funds. One of the good things about mutual funds is that it lets small investors participate in a professionally managed investment. It is difficult to do if you only have a small capital.
Being a shareholder in a mutual fund is similar to buying a stock, you own a portion in that company depending on how much you contributed. The amount you gain will be from the earnings of the company proportional to your shares. Another way of making money through mutual funds is by selling your stocks. Your profit here will be the increase in the value of the shares.
Exchange Traded Funds (ETFs)
Now that you know how mutual fund works, it should not be hard for you to understand exchange traded funds. It is very similar to mutual funds; it consists a number of investors, can be invested in stocks, bonds, or any kinds and combination of assets, and each investors buy or own share which represents their part of interest when the capital earns profit.
What makes it different from mutual funds is its flexibility. You can do transactions at any time of the day with ETFs, while you can only do it once a day with traditional mutual fund. Trades can take place any time the market is open and as often as you want.