An investment is when a consumer allocates some of their money into stocks, goods and other assets with the primary financial goal of generating more money in the future.
Consumers can invest their finances in a wide variety of investment types such as real estate, bonds or money market funds. The most common types of financial investments are stocks, bonds, mutual funds and alternative investments, but there are many more investment opportunities available.
Using the right method, consumers can earn enough capital to fund their retirement and other financial objectives. While investing can be a great way for consumers to make a profit using their finances, it is important to learn about the investment opportunities beforehand. All potential investors are encouraged to do some research before investing their money in order to make more educated financial decision.
Out of all the different types of investments, stocks are the most well-known and often the most effective ways to build capital. Also referred to as equities, stocks essentially represent shares of ownership for a business. When a consumer purchases stocks in a company, they are entitled to a portion of the business’ profits and assets or some other form of financial compensation. Investors can choose between two main types of stocks:
- Common Stocks – A common stock is one where an investor is entitled to a portion of a business’ earnings and losses. Investors who hold a large portion of a company’s stocks may sometimes be given a vote at shareholder meetings. Investors with experience in stocks will generally prefer common stocks because they have a greater potential for returns.
- Preferred Stocks – Preferred stocks generally do not entitle investors to voting rights within a company and the value of the stocks do not usually appreciate. Instead, preferred stocks guarantee investors a specific dividend payment to be paid out at a predetermined time. Preferred stocks are less risky than common stocks because preferred shareholders are always paid out first in the event of a company bankruptcy or foreclosure.
Another popular type of investment is a bond, which is basically a loan that an investor makes to a company or institution. In return, the business will typically may investors back with interest. Bonds are often used by corporations and governments in order to fund the cost of operating or expanding certain projects. Investing in a company through bonds is usually a low-risk investment, especially when the bond is made to a financially stable organization. This form of investment is often referred to as a fixed-income investment since the money that investors will receive is based on how much they initially invested.
Mutual funds are great for beginning investors because they offer an introduction into the world of investments. In short, a mutual fund is a portfolio of stock, bonds and other securities funded by money from thousands of different investors. This pool of money from investors can be used to collectively invest in stocks, bonds and other securities known as portfolios. Each mutual fund has a professional fund manager who is responsible for monitoring portfolios and marketing conditions in order to make the most profitable investment decisions with the investor’s pool of funds.
Individual investors who are have little experience or are lacking the time to oversee investments can find many advantages to investing in a mutual fund. Since mutual funds are overseen by a professional and experienced fund manager, individual investors will not need to devote as much time and effort into monitoring portfolios and market conditions to make a sound financial investment. There are three primary categories of mutual funds:
- Equity or Growth Funds – These mutual funds are typically invested in stocks with the goal of achieving long-term capital growth.
- Fixed-Income Funds – These types of funds are usually for short-term, low-risk investments such as treasury bills, government bonds and investment-grade corporate bonds. They are often referred to as fixed-income securities.
- Balanced Funds – These are invested in a combination of bands, stocks and money market funds in some occasions.
Short-term investments that are easily exchanged into cash amounts are referred to as cash equivalents. These individual investments are usually stable but generate a low return rate. Some examples of cash equivalent investments include:
- Money Market Funds – This cash equivalent option works like a combination of checking and savings account, except they typically offer higher interest rates. Generally, money market funds have limits on the transactions that can be performed and they also have a higher balance requirements than other account types.
- Certificates of Deposit (CD) – These cash equivalents prevent an account holder from withdrawing money for a specified period of time. During this time, the money in the account will accrue interest over the restricted access period.
Any investments that fall out of the definition of traditional investments such as stocks, bonds or cash equivalents are often referred to as alternative investments. Some common types of alternative investments include:
- Real Estate Investments – Investments in real estate can come in a wide range of different forms such as investing in housing, apartments, office buildings and other types of residential or commercial properties. Real estate investments can be made to either rent out or to repair and resell a property.
- Hedge Funds – Hedge funds work similarly to mutual funds where multiple investors pool their money to invest into different securities. The main difference between hedge funds and mutual funds comes from the minimum investment amount. Typically, hedge funds require a minimum investment of one million dollars.
- Venture Capital Funds – Venture capital funds are direct investments that are made to support early- to growth-stage companies or startup who are attempting to expand their business. These investments can be the most risky, but they also have potential for sizable financial returns.
- Franchising – When an investor purchases an existing company with a pre-made business model, training curriculum and support, it is called franchising. Investors in a franchise will typically run the business that they invest in.
- Real Asset Investments – The purchasing of tangible assets like artwork, precious metals, luxury goods and collector’s items.