Investments can be a very complicated subject. There are a wide variety of different types of investment products and new ones are emerging all the time. What we will attempt to do in this article is to give you a good overall view of investments as a whole and discuss aspects of each specific type.
An investment can be one of two types. It is either an equity investment or a debt investment. These are the two broadest forms of investments.
A debt investment is where you loan your money to someone else for an amount called interest. A debt investment is unique in that the borrower is obligated to the debtor to pay the money back.
An equity investment is where you loan your money to someone else for a share of the profits they receive from the way they use the money. An equity investment differs from a debt investment in that there is no obligation on the part of the debtor to pay you back. Debt investments give you a lower return than equity investments. Debt investments are also lower in terms of risk than similar equity investments.
The broad categories of debt investments include: bonds of all types (corporate, municipal and government), Bank CD’s, personal loans and a special class of hybrid stock called preferred. Each of these investments are something you purchase or place your money into in return for the interest that is generated over time and paid back to your personally. All of these investments have some protection in the event of a bankruptcy and you are entitled to receiving something back from a liquidation of assets if that were to occur. All of these investments carry with them a low to minimal amount of risk and are thus appropriate for more conservative investors or for anyone only able to leave their money in the investment for a short period of time (up to about 3 years).
The broad categories of equity investments include mainly stocks and a more esoteric investment called an option. Stocks are essentially a share of ownership you receive in a corporation in return for letting them use your money. The stock will have a value in the open market should you decide to sell it and in some cases it will pay you dividends as well. Most people buy stocks in the hopes that they purchase it at a low price and are then able to sell it at a high price. This happens because the corporation has performed well and increased its value during the time period between the purchase and the sale of the stock. The reverse can also happen. You may buy the stock at a high price and then subsequently sell it at a lower price for a net loss. This is the risk associated with stocks.
Ideally an investment portfolio should have some of both of these investment types. In general, money that will not be needed for three years or more are most appropriate for investing in stocks while money that will be needed in three years or less are most appropriate for bonds. Using this guideline you can allocate your money as best fits your personal situation.
It is always recommended that you deal with an investment professional for making investments. These are professionals that devote their entire lives to understanding and being aware of the intricacies of investments and thus they can help you make better decisions. It is best to choose an investment professional based upon the recommendation of someone you know. There are various types of investment professionals that you can learn more about in our investment category.
Information is for educational and informational purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.