Investments – Types, Risks and Rewards

Investing is simply the act of putting your money to work with an expectation of some sort of reward or benefit in the future. In financial terms, it is an acquired asset that brings a reward which is referred to as a return. It can also be a monetary asset acquired with the aim that it will be sold in the future at a higher price for profit. From the economic point of view, it is the acquisition of goods or services that are not consumed immediately but used as a wealth or income-generating vehicle for the foreseeable future. Most often than not, these are usually tied to time.

In order words, you send your funds out to work for you for a period of time and when it returns, it brings with it either an increase or a decrease (capital appreciation or depreciation) as the case may be based on different market factors. You can see more about all these here.

An increase, capital gain or appreciation, may come in the form of interest, dividends, direct income or revenue such as rental income, etc. It can also come as a combination of both income and capital gain. A decrease typically comes as a result of market forces such as inflation, demand, foreign currency exchange, negative political climate, etc. In some cases, it can also be as a result of poor judgment either on the part of the investor or the organization the individual is investing in.

Typically, riskier investments bring higher returns while for less risky ones, returns are generally low. No matter the case, every investor expects to get a return that culminates in an increase and not one that is a decrease which results in a loss.

To help with this, it is always advisable, especially for new investors to go for strategies that help them diversify their portfolio. Diversification does not take away the risk, it only tries to help reduce it. With the diversification of an investment portfolio, if one investment does not work out as you wish, some others might.

A Word about Savings and Investments

Savings is when a person accumulates money for future use without risk while investments usually involve a certain level of risk. With Savings, your money does not work for you neither does it appreciate or even depreciate (except through inflation). In investment, your money works for you and it is either you gain or you lose.

Types of Investments

When it comes to investments, there are different types and options available and they all have their upsides and downsides. Some of the most common include bonds, securities, real estate, stocks, options, and trading commodities such as gold, etc.

Economically, producing goods can be seen as a form of investment same as just buying goods and selling them at a higher price. A purpose-built facility that allows you get returns as activities go on there is also something that folks invest in. An example may be building a parking lot. An individual can also invest their money in a company, enterprise, project or even an intellectual property.

Simply spending money or time to learn anywhere (maybe in a school or educational institution) to get skilled so that you can earn more can also be regarded as an investment.

To be successful in any one of these, especially the high-risk items which are usually mostly financial investments, it takes a level of knowledge, experience, and expertise. This does not in any way guarantee that you will not still face or experience risk. However, knowing what is involved and what it takes will help you make better judgment calls thereby reducing your risks. You can always get some investment tips from experts to help broaden your view and guide you through the process.

Although all the aforementioned things can be regarded as investments, the term is most closely associated with financial instruments and tools such as bonds, stocks, and the likes. Below are some of the ways an individual can invest in the financial market.

Stocks

This is one of the most popular and best ways of investing in the financial market. Investing in stock means you become a part-owner of a company and own equity or shares in that company. Its success is based on factors such as how well the company performs in the market in terms of stock trading, the kind of stock option that you own, and the market forces that are determining what is happening in the stock market.

Mutual Funds

Mutual funds are like a pool of funds from different investors with these funds being diversified into different things such as stocks, bonds, securities, and other financial assets. These kinds of funds are usually operated by money managers who take up the responsibility of investing the money for you so that you can get a good return. It is one of the safest forms of investment as the risk is shared amongst everyone in the pool and the funds are diversified into various kinds of investments. It has some downsides too as you get very little returns on your investment and you will still need to pay the money manager a percentage of that.

Bonds

This is a sort of a loan that a person gives to a corporation or government agency in exchange for interest over a specified period while the principal is then repaid at the maturity date of the bond. There are several varieties of bonds: corporate bonds, agency bonds, treasuries, municipal bonds, and so on. In this kind of venture, there is always a risk that you might lose money. This is especially true when you buy individual bonds and need to sell before maturity. Bonds, like stocks, can be components of a diversified portfolio.

Options

Options are financial instruments that give the purchaser a right but do not require the purchaser to buy or sell an underlying asset or security which can be a stock, bonds, etc. at a fixed price and within a specific time frame. Although they can help an investor manage risks, there is still the possibility of losing money.

Asides the above-listed forms of investment, there are many others available such as commodity futures, annuities, commodities trading, insurance, cryptocurrency trading, etc. You can learn more about these different types in this article: https://smartasset.com/investing/types-of-investment. 

Conclusion

Before now, to invest in any financial tool, you had to go through people such as stockbrokers, investment bankers, etc. and it seemed like investing was a playground for only rich and wealthy people. These days, you can easily start investing in the financial market with online tools and apps that were created by financial experts. There are different ones available depending on the kind of investment you would like to make.

Whatever you do, before diving into anyone, it pays to learn about it, the risks involved and strategies for trading. In the initial stages, you can enlist the help of financial and investment experts. You should also read financial newsletters and reviews.