Investments
(Are you looking for investment definition?)
Investments are instruments that allow us to receive a higher amount of money than was spent. If someone spends 10 euros or dollars and he knows that he will receive a 20 euros or dollars because of that action (no other work is made), then this is an investment. In principle, any purchases or cash spending methods can be allocated to consumption or investment. It may also be mixed variations that would have some characteristics of an investment but at the same time would have consuming benefits, for example, real estate that you are living in.
Investments are instruments required for those who have some free funds available and want to have more benefits from that capital in the future. If cash would be only accumulated and not invested, that would be an inefficient way to create wealth. Money have to be employed, and that can be made with help of investments. Every investment is made with expectation to get more money than was invested in the beginning although it is not always guaranteed.But if you acquire something with on purpose to make money from it in the future, this is an investment.
Clearly, some investors might argue here that it is possible to buy something at the market and quickly sell it for a higher price, and that would be a speculation, not an investment. In order to distinguish speculation from investment, attention should be paid to the period – investment is a long-term process, although it is difficult to say where exactly investment ends and starts a speculation. Investments may be financial and non-financial.
Types of Investments
Financial investments (securities):
- Stocks (shares)
- Bonds (debt securities)
- Cash (money market instruments)
- Commodities (could be assigned to non-financial investment)
- Derivatives (derivative instruments like futures and options)
- Mutual Funds (could be assigned to derivative investment)
Non-financial investments (investment in tangible assets):
- Property (real estate)
- Collections of art or other valuable assets (crafts from gold and other materials)
- Direct investment - tangible assets that are used in activity is investment as well
Clearly, investments that are used at investing process may vary by characteristics very widely and there are no good or bad investments; there are only proper investments for a proper investor in a specific environment.
Every investment has its own characteristics, but all of them may be summarized in few features:
- Return (yield) of the investment shows what profitability might be expected in annual basis. Historical returns do not play the main part in here, because future returns depend on many other factors too. It easy to predict yield for fixed income securities, but is much harder to forecast the return for equities.
- Riskiness is a next most important factor for the investment. Riskiness usually is measured as a standard deviation which shows how strongly investment fluctuates in value. The higher investment fluctuations in value the higher is the risk.
- Correlation is also important factor when modeling complete investment portfolio. This characteristic does not exist for single investment, but may show the correlation of investment compared to other investments. If the correlation with other assets is low, investment may be valuable for the portfolio despite lower return.
In the chart below you can see the comparison of investments by risk and return levels:
Also check a website of US Securities and Exchange Commission; it may help you to avoid some possible frauds while investing.
Are you looking for more usefull information about investments? You should try the book 'Investing for Beginners Exposed"!
