What Is Investment? And What Are The Types Of Investment? – A Complete Guide In 2021

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Investment

When we think about additional incomes, the first thing that comes to our mind is an investment. In today’s world, almost every one of us makes any kind of investment or thinking and planning to do that. But before we step into the world, it is necessary to know some details. 

Though the concept of investment is pretty much clear in our minds, there are still some misconceptions or a lack of accurate knowledge. And due to this we often make some wrong decisions that affect our financial capital

So, let’s clear all those misconceptions and fill in the gap that we have in the chapter on investment. Let’s start with the definition, and then we will move into the different types of investment. 

What Is Investment?

An investment is an item or asset that is gained with the goal of generating income or appreciation. Here, appreciation refers to the increase in the value of the asset over a period of time. 

When anyone purchases any good as an investment, his or her intention for that good is not to use it. Rather he or she uses it in the future in order to create wealth. Always an investment covers the outlay of some asset today, such as time, effort, or money.

And this entire thing is done with a hope of a greater payoff in the future than what originally was put in. For example, an investor may buy an asset in the present day with the idea that it will pay in the future, or at least can be sold later at a higher price. 

Its Features

Here are some basic features of investment. From the above discussion, we can easily some up all these features. 

  • An investment is an item or asset, which is bought with the hope that at some point in the future, it will appreciate in value or generate income. 
  • An investment always covers the outlay of money, time, or effort today and also hopes that in the future, a great one will pay off greater than what originally was put in. 
  • Any kind of mechanism that you will use in order to generate future income. The investment includes stocks, bonds, real estate property, or a business. 

How Does An Investment Work?

Investment Work

The central concept of investing is all about generating income along with increasing value over time. As I have mentioned earlier, you can think of any mechanisms for generating future incomes and consider it as an investment.

This can be the purchase of real estate property, stocks, or bonds, among other examples. In addition to this, buying a property, which you can use for producing goods, also can be considered an investment. 

In general, any action that you are taking with the hope of raising future revenue can be treated as an investment. For example, when you choose to go for higher education, your goal is to gain knowledge and learn new skills, which will give you a return in the future. 

As investing is aligned towards the very potential for future income or growth, a certain level of risk is always associated with an investment. There can be a scenario where the investment fails to generate any kind of income, or overtime loses its value. 

For example, it is totally possible that you invest in a company, which goes bankrupt, or a project that fails massively to materialize. This is the primary way of differentiating savings from investment. 

Saving is all about accumulating money for future use, and it does not welcome any risk. On the other hand, investment involves the act of leveraging money for a potential future gain, and thus it entails some risks. 

What Are The Different Types Of Investment?

Now, as you get the idea about what investment is along with the differences of investment with other financial plannings, it is time to know about the different types of investment. Every investment type has its own features and advantages to meet your future financial goals

Here are the different types of investments with their details. 

1. Stocks

Stocks

Investing in stocks makes you one of the owners of the corporation. Have you heard of equity shares? Yes, this is also known as ownership share, which is represented by stocks. On the basis of the success or failure of the company, you will either make or lose money. 

There are also some other factors as well, which will determine your success, and they are,

  • The type of stock you own.
  • What is going on with the stock market currency?
  • Some other factors as well. 

Foreign direct investment also belongs to this category. 

2. Bonds

Bonds

Think of a bond as a loan. Investors offer this to federal agencies, government, corporations, or any other organization. And in return, the investors get interest payments over specified terms along with the repayment of the principal amount at the maturity date when the bond becomes mature. 

In the market, you will find various types of bonds. Here they are.

  • Agency bonds.
  • Municipal bonds.
  • Treasuries.
  • Corporate bonds, and many more.

Just the same way, there are also many types of bond mutual funds. When you are investing in bonds and bond mutual funds, you are always exposed to the risk that your investment may lose money. This increases when you buy an individual bond and need to sell it before its maturity.  

Just like stock mutual funds, bond mutual funds prices also fluctuate. The risk depends on the type of bond that you own. 

3. Mutual Funds

Mutual Funds

When you go for mutual funds, you will be able to buy a large number of investments, and that is also in a single transaction. From many investors, these funds pool money. After that, they employ a professional manager for investing the money in bonds, stocks, and also other assets.

Mutual funds always follow a set strategy. In a particular type of bond or stock, the fund might invest. This can be government bonds or anything like international stocks. At the same time, there are also some funds that at the same time invest in both bonds and stocks. 

The investment within the fund will decide the risk factors for the particular investment. 

4. Index Funds

An index fund is a type of mutual fund. Instead of paying a manager, who will pick and choose the investment, index funds passively track an index. It is like an index fund S&P 500 index fund will focus on mirroring the performance of the same by holding stock of only those companies, which come within that index.

As index funds do not have any active manager on the payroll, the cost automatically comes down. Isn’t this a great benefit of index funds? On the basis of the investment within the fund, the associated risk of an index fund will vary.  

5. ETFs

ETFs or Exchange-traded funds are a type of index funds. The first track a benchmark index, and after that, focus on mirroring the performance of the index. Due to the absence of an active manager, just like index funds, ETFs are also cheaper than mutual funds. 

The purchasing process of ETFs brings the major difference between ETFs and index funds. The same way a stock is traded on exchanges, you can also trade ETFs on exchanges. This means you can access ETFs throughout the day, and the fluctuation also happens throughout the day. 

On the other hand, index funds, and mutual funds are always priced once, and that is at the end of the trading day. It does not matter at what time you sell or buy it; the price will stay the same. In case you want more control over the price of the fund, you can opt for ETFs. 

Some people also consider Gold as an investment. As the price of gold also fluctuates and mostly has a great potential to offer higher returns, many normal people love to put their money on gold.

6. Real Estate

Real Estate

Real estate investment is really popular now. Any investor can acquire real estate by directly buying residential or commercial properties. There is also an alternative way. Being an investor, you also can purchase a share in REITs or real estate investment trusts. 

REIT acts just the same way mutual funds act. Here also, a group of investors pools their money together for making a purchase of properties. On the same exchange, they traded like stocks. 

Some More Alternative Investments

Apart from the above-mentioned ones, there are also some money-making techniques that you can consider as a type of investment. 

  1. Hedge Funds With Basis Risk And Private Equity Funds
  2. Commodities
  3. Options
  4. Annuities
  5. Retirement
  6. Saving For Education
  7. Alternative And Complex Products
  8. Cryptocurrencies
  9. Security Futures
  10. Insurance

What Are The Five Stages Of Investing?

Here are the five stages of investing,

  1. Put and take account.

After that, 

2. Beginning to invest.

And then, 

3. Systematic investing.

Later,

4. Strategic investing.

Now lastly,

5. Speculative investing. 

How To Make An Investment In 2021 – A Beginner’s Guide

If you are a beginner or thinking about starting to make an investment, all the information that I have provided till now will help you a lot. It is really important to have a depth of knowledge about something when you are thinking of dealing with that. 

Here is a brief step-by-step guide that will help you to make the right investment in the right way. 

  • Start your investment planning as soon as possible. But that does not mean that you need to rush to it without knowing anything. But make sure you are not delaying it without any unnecessary causes. 
  • Determining the amount you will invest is a crucial one. When you are investing your money, you are also exposing it to certain risks. So, always make sure that you are investing only the same amount of money, which you can afford to lose.
  • For making any kind of investment, you will always need an investment account, so after you have done your research about where you want to put your money along with the exact amount, you should open an investment account. 
  • The space of investment offers you a bunch of options, but all of them are not right for you. So, you need to understand all the options that you have. After analyzing then you can take your final decision.
  • Now everything is almost set, and you are ready to make your investment. But there is something still left, and that is your investment strategy. In case you are enough pro, you can develop your own strategy, or you can take help from a professional one. 

Frequently Asked Questions (FAQs)

Here are some frequently asked questions that will help you to understand the concept of investment more deeply. 

1. What Is The Most Common Type Of Investment?

This question has a single word answer, and that is “STOCKS.” Stocks, also popular with the name Shares or Equities, are most probably the most common type of investment. When you are putting your money in stock or buying one, you are actually buying an ownership stake in a company, which is publicly traded. 

2. What Are The 4 Types Of Investment?

Well, I have covered all the types of investment. But if you want to know the 4 types of investment options that are most popular, here are them.

  • Stocks.
  • Bonds.
  • Mutual Funds.
  • ETFs.

3. What Are The 3 Types Of Investment?

Though I have mentioned all the types of investment that are available in the present world, there are three main types of investment. And these three are,

  1. Stocks.
  2. Bonds.
  3. Cash Equivalent.

4. What Are The Investment Tools?

You already know about different types of investments. These different types of investments are considered investment tools because through all these; you are making the investments. Examples, bonds, stocks, index funds, mutual funds, real estate, ETFs, and others. 

5. What Do You Mean By Investment?

 Investment is basically an asset acquired or invested in for building wealth and saving money from the income or appreciation that you are earning. Primarily investment is made in order to obtain an additional source of income or acquire profit from the investment over a particular period of time. 

6. Which Of The Following Is An Example Of Investment? 

As now you have got all the basic ideas about the world of investment, let’s see whether you can answer this question by yourself or not. Do not worry; if you miss it; I am here to answer. But first, let’s check what options we have.

  1. A person adding money to his or her retirement fund.
  2. The purchase of pill counting machines by Walgreens.
  3. A person depositing $100 on a weekly basis to his or her savings account.
  4. A person investing $250 every month in the stock market. 

I hope you get the answer, right? Yes, the answer is option D. A person investing $250 every month in the stock market. 

Final Words

So, this is all that you need to know about investment. I hope you get your answers from this article, but if you still have any confusion or doubt, do not risk your money. You can ask me in the comment section or directly write to me, and I will try to come up with the answers as soon as possible so that you do not have to wait for a long time to make your investment.

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