Investing may seem complicated at first. Having many kinds available, it may even seem difficult, especially for beginners, to choose the best investment option according to their financial capacity and risk tolerance. If you are one with the people wondering what the right investment is to make, read along and learn about the different types of investments and how they work.
The General Types of Investments
To help you understand the many different investment options available, let us first classify investments into three categories: ownership investments, lending investments, and cash equivalents.
Ownership investments, as the name suggests, refers to assets which are purchased for investors to own. This is the most volatile and profitable class of investment since it allows people to own a piece of a company, enabling them to generate revenue and profits, sometimes even faster than the rate of inflation.
Lending investments, on the other hand, are debts which investors buy, expecting them to be repaid. This works when lending companies find people with money, and match them with those who need funds and are willing to pay an amount of interest for it. Through this mechanism, investors earn profit through interest.
Finally, cash equivalents are investment securities in the form of treasury bills, treasury notes, certificates of deposit, and other commercial papers. This works when investors put money into a cash equivalent account, allowing them to earn profits based on the accumulated interest of their deposited fund. Generally, interest-bearing cash equivalents mature in 90 days or less, but in some cases, it can take up to one year.
Now the three general categories of investments have been tackled, let us look into the investment options available under each class.
Kinds of Ownership Investments
When people invest in stocks, they become owners of a portion of a company, no matter how minuscule it may be, since stocks represent ownership shares. This gives investors a residual claim on corporate earnings in the form of dividends and capital gains. In other words, the profit you will make from investing in stocks is solely determined by the success or failure of a company and the market conditions surrounding it. The greater the company’s success, the higher your earnings may be. Otherwise, you may suffer losses along with it due the unavailability of funds that it can declare as dividends.
2. Stock-owning Mutual Funds
When people invest in mutual funds, their money is pooled with the assets of many other investors. The pooled funds are then invested in stocks from various companies by financial investment firms, allowing investors to own a portion of a company along with their co-investors. However, unlike investing in stocks alone, risks are diversified in mutual funds as the co-investors share their losses, if any.
Kinds of Lending Investments
A bond works when investors loan money to a corporation in exchange for payment of interests over a specified period, along with the repayment of principal at its maturity rate. When you invest in bonds, the profit your assets will earn will depend highly on the liquidity of a company and their ability to pay you back. The more capable a company is, the higher the chances your assets will earn.
2. Savings Account
A regular savings account is considered as an investment. When people open this kind of account, they essentially lend their money to banks, which will accumulate earnings through interests over time. However, unlike the other types of investment, payment by the bank is generally upon demand through withdrawals, rather than upon maturity or a specified period. The longer people store their money before they withdraw it, the higher the accumulated interest will be.
Kinds of Cash Equivalent Investments
1. Short-term Certificates of Deposit (CDs)
CDs are investment contracts offered by banks. This works when an investor purchases a certificate payable on a specific period, where its value and the corresponding interest rate are guaranteed by the bank. With this, an investor will know exactly how much money they will make even upon purchase.
2. Money Market Funds and Accounts
Money market is an investment made by an issuer in a short-term, interest-bearing security. They make an excellent cash equivalents investment since they are highly liquid, allowing them to be used for any purpose with very little notice. This allows investors to earn profit through interests accumulated.
To know more about the best investment option for you, reach out to the financial advisors at AIX Investment, a top investment company in Dubai.