Introduction of Investment
Investment is an asset that is acquired with the anticipation of generating an income or profit or price appreciation. The benefit derived from the investment is called a return. Risk and returns are directly proportional (i.e.) Higher the risk, higher are the returns.
Investments are made for Income generation, future benefits, capital appreciation, and wealth creation. Investments are always targeted towards future returns hence it comes with some risk. Investments generate income in two ways. One, invest in an asset which gives profit on the sale (i.e.) Capital appreciation and the other is an income generation plan where a regular income can be earned from those assets (i.e.) Dividend, Interest, Rental income, etc. The capital appreciation type of investment has more risk compared to the income-generating investment type. Investments can be in the nature of ownership, lending, and cash/liquid assets.
Low-risk investments are Certificate of deposits, Fixed deposits, Bonds, etc. that yields lower returns. They are an income-generating investment model. High-risk investments are stocks, Commodities, Derivatives, etc. that yield higher returns. They are the capital appreciation, investment model. Risks and returns vary within the same investment class. E.g. Shares. The investment in blue-chip stocks is more secured compared to investment in mid-cap stocks and small-cap stocks.
Examples of Investment
There are various investment options available. Some of them are discussed below
Stocks of publicly listed companies are traded in the secondary market and the same can be bought by any individual. The investment in stocks can either be long term or short term. There are two types of return which the stocks offer one is price appreciation in stocks and the second is receipt of dividend. The risk of investment is higher in stocks as there is no guarantee on investments.
Example: X Corp is an e-commerce listed company in the US. The following are its stock trading price over 2 years.
If Mr. Y has purchased 10 X Corp shares on 1st Jan’17 @ $1940/share, the investment value is $19,400, the same share price on 1st Jan’19trades @ $2600/share, the value of the investment increased to $26,000. The capital appreciation over 2 years is $6,600 which is 34%. The risk in this investment is high, so the returns are also high.
Bonds are debt instruments that are issued by government entities and corporations. This debt instrument offers periodic interest and the bond’s face value will be returned on maturity. They are also known as fixed-income instruments.
Example: HS bank issues bonds. Mr. A purchases a 5-year $1 Million HS bond with a 10% coupon rate.
This investment plan makes HS bank pay Mr. A, the interest of $100,000 every year for 5 years and at the end of the 5th year, $1 Million will be paid back to Mr. A.
3. Fixed Deposit/Certificate of Deposit
Fixed deposits are investments predominantly deposited with banks. It yields fixed interest income and the original investment money is repaid to the deposit holder at maturity.
Example: Mr. B deposited $1 Million in XY bank which pays 10% interest per annum. This is a one-year deposit plan. On completion of one year, Mr. B will be paid $100,000 as interest and $1 Million the initial deposit value.
4. Options and Derivatives
Derivates are financial instruments and their value is derived from other instruments like stocks or indexes. Options are a derivative instrument that gives the buyer the right but not the obligation to buy or sell a security at a fixed price within a specific time. Derivatives are at high risk and high reward instruments.
Funds are pooled investment plans and it will be managed by investment managers. Through this fund investor’s money is invested in stocks, bonds, commodities, etc. The common types of funds are mutual funds and exchange-traded funds (ETF). Mutual funds are not directly traded on an exchange are valued at the end of each trading day based on Net asset value. ETFs are traded on the stock exchange just like stocks.
6. Investment Trusts
Trusts also come under the pooled investment category. Real Estate Investment Trusts (REIT) is common in this category where the pooled investment money is invested in commercial or residential properties and the rental income generated from those properties is distributed to the investors.
Commodities are products like financial instruments, currency, oil, metals, etc. They can be traded through commodity futures – that gives the buyer the right but not the obligation to buy or sell a specific quantity of the commodity at a specific price at a specific date and through ETFs. Commodities are used for hedging risks or for speculative trading.
8. Real estate
Real estate is land, buildings, property, etc. The return on this investment is the price appreciation of the real estate asset value and rental income can also be generated from real estate built-in property. Real estate can be in the form of Residential property, Commercial property, Industrial property, and land.
Investments are so important as it gives financial security for the future and it leads to wealth generation. Investments can keep the money safe and it is up to the investor to choose the right investment based on their risk appetite. It makes the money grow (i.e.) capital appreciation of investment over time and it also generates a regular source of income. It helps to achieve long-term and short-term financial goals. There are various sources of investments and every investor will have his strategy and goals.
This is a guide to Investment Examples. Here we also discuss the introduction and examples of investment along with an explanation. You may also have a look at the following articles to learn more –