What is investment?

Investment refers to purchasing assets aiming earning returns in future. Assets can be either, tangible such as land, property, and vehicles or intangible such as stocks, bonds, loans or any other financial instruments. Investments carry certain degree of risks. Risks and returns go in same proportionate; higher return involves higher risk and vice versa.

There are different types of investments both in long and short terms. New investors must understand each type of investment option and recognize the risk associated with it.

Types of investments

Investments can be classified as long, short and medium terms. Short term refers to less then one year; long term refers to more than five years and medium term refers between one and three years.

On the basis of risk taking ability, investments are classified as conservative, balanced and aggressive or growth oriented. The conservative investment type is where the investor puts money on safe instruments such as bank deposits, bonds, etc. This type of investment protects the capital, but fetches less income. Balanced investment style suggests spreading investment among both safe as well as growth options equally. Both complement each other in times of uncertainties.

Aggressive investment style seeks more returns and people willing to take higher degree of risk are considered right.

Investment Options

There are many investment options available in the market. Investors need to choose the appropriate options according to their financial goals and risk taking abilities.

Cash Investment- Bank saving accounts and Certificate of Deposits come under this category. Cash investment is highly liquid and can be enchased in short notice.

The rate of returns is much lesser than any other type of investment and capital appreciation is negligible. Cash investment is ideal for meeting short term cash requirement such as medical expenses.

Bonds- Bonds are issued by federal and state governments to fund welfare programs. These are basically debt instruments, carrying a fixed rate of interest. Bonds are redeemable after a specified period. Bond investment is a much secured way of investing for people seeking regular income with security on capital.

Stocks-Stocks or shares are issued by the companies for subscription to the public. Investors on stock become partial owners of the company in proportionate to their share holding. Stocks are listed on leading stock exchanges and are tradable. Stocks prices are highly volatile and the risk involved is very high. Stocks fetch very high returns in long run.

Mutual Funds- Mutual funds mobiles money from the investors and invest on various avenues such as stocks, bonds, government securities, real estates, commodities, etc. Mutual funds are managed by experienced fund managers and their investment policies are guided by extensive research and well-defined policies. Thus, they bring professionalism and expertise to common investors, besides regulation and transparency.

Commodities: Commodities such as agricultural and industrial products are used as effective investment vehicles. There are commodity exchanges in all major countries that facilitate commodity trade among investors. However, commodity trading requires specialized knowledge and expertise.