Investing & Investments

November 23, 2010Asset Managementby EconomyWatch


Investment refers to the concept of deferred consumption which may involve purchasing an asset, giving a loan or keeping funds in a bank account with the aim of generating future returns. Various investment options are available, with differing risk-reward trade offs. An understanding of the core concepts and a thorough analysis of the options can help an investor create a portfolio that maximizes returns while minimizing risk exposure.

Types of Investments

The various types of investment are:

  • Cash investments: These include bank savings accounts, certificates of deposit (CDs) and treasury bills. These investments generally pay a low rate of interest and are risky options in periods of inflation.
  • Debt securities: This form of investment provides returns in the form of fixed periodic payments and possible capital appreciation at maturity. It is a safer and more 'risk-free' investment tool than equities. However, the returns are also generally lower than other securities.
  • Stocks: Buying stocks (also called equities) makes you a part-owner of the business and entitles you to a share of the profits generated by the company. Stocks are more volatile and therefore riskier than bonds.
  • Mutual funds: This is a collection of stocks and bonds and involves paying a professional manager to select specific securities for you. The prime advantage of this investment is that you do not have to be involved in tracking the investment. There may be bond, stock- or index-based mutual funds.
  • Derivatives: These are financial contracts which are derived from the value of the underlying assets, such as equities, commodities and bonds, on which they are based. Derivatives can be in the form of futures, options and swaps. Derivatives are used to minimize the risk of loss resulting from fluctuations in the value of the underlying assets (hedging). 
  • Commodities: The items that are traded on the commodities market are typically agricultural and industrial commodities. These items need to be standardized and must be in a basic, raw and unprocessed state. The trading of commodities is associated with high risk and high reward. Trading in commodity futures requires specialized knowledge and in-depth analysis.
  • Real estate: This investment involves a long-term commitment of funds and gains that are generated through rental or lease income as well as capital appreciation. This includes investments into residential or commercial properties.

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