Investing is one of those topics that most people tend to avoid. This could be the case for a number of reasons such as knowing a person who tried to invest in the markets and ended up going bankrupt as an extreme example or just losing a large sum of money from making a bad investment decision. But, on the flip side there have been a significant number of people who were able to transform their entire lives from them. So, it’s definitely one of those things that are worth looking into. This blog post is intended to break it down into small understandable sections that can be followed and understood very easily.
This particular blog post will focus primarily on what an investment is, and the different types of investments that are available.
Firstly, What is Investing? Investing is simply the act of committing money or capital to an endeavour with the expectation of obtaining an additional income or profit. Or as the legendary investor Warren Buffet would define investing as: “… the process of laying out money now to receive more money in the future.”
To ultimate goal of investing would be to put your money to work in one or more investment types with a diversified ratio in hopes of gaining a return.
Below you can see a well designed Info-graphic displaying a well diversified portfolio to give you a rough idea.
What are the different types of Investments?
There is a variety of investment types to choose from. Ranging from individual stocks, bonds, real estate, closed-end mutual funds to ETFs and various other alternative investments. We will break each type down into understand paragraphs.
A stock of a company represents a small percentage ownership in that company which allows you as an investor to participate in the company’s successes or failures through the stocks value and the dividends received. In the category of stocks, there are two types of stocks. One is ‘common stocks’ and the other is ‘preferred stocks’.
Holders of common stocks do have voting rights in shareholder’s meetings and the right to receive dividends if they are declared by the company. Preferred stockholders do not have voting rights but do receive a preference in terms of the payment of dividends.
Bonds, simply put are loans made to either the government or large organisations. These would include national governments, cities, and corporations. In exchange of periodic interest payments and the purchase of the bond back once matured upon a pre-agreed date.
Bonds can be purchased on the secondary market the same way as stocks and the value can also fluctuate on a number of factors; the most important direction being interest rates.
A mutual fund is a bunch of investments pooled into one, which is managed by an investment manager. This allows investors to have their money invested into stocks, bonds, and other investment vehicles which is usually stated in the fund’s prospectus. Each fund has different investment options. Mutual funds allow investors to achieve a diversified exposure to a number of investment holdings.
Real estate investments can be made when purchasing a commercial or residential property directly.
The Landlord (Owner), would be responsible for paying the mortgage, taxes and covering maintenance costs. The landlord would typically charge enough rent to cover the costs mentioned above. Sometimes, landlords tend to charge even more in order to produce a monthly profit. The appreciation of properties gained over a period of time leaves the owner with a more valuable asset. Before investing in real estate, it is wise to conduct research on market conditions and evaluating if it would be a worthy investment.