What is an Investment?
An investment is an item or asset purchased with the idea that it will generate income or appreciate over time. The prospect of gaining more money at a later time is what motivates people to invest in the first place.
Types of Investments
Here are five types of investments we think you should consider
When a company is ready to go public, they divide ownership into little bits called shares and sell to investors. Buying stocks is an easy way to invest your money. When you purchase stock, you are purchasing an ownership stake in a company. No matter how little it is, it still comes with the right to a portion of a company’s value. Stocks, like all investments, do, come with risks. If they are up, you can sell at a profit, and if it goes down, you’ll lose money.
Bonds are a way of lending money to an entity that could be a government or a corporation. Government issues treasury bills while businesses issue corporate bonds. After holding a bond until maturity that is, a predetermined period, you receive the principal invested and a determined interest rate. Bonds carry a lower risk, so the interest is usually smaller than stocks. However, there is a probability that the entity may go bankrupt, and then you may get little or nothing back. You might want to check out this post on the types of bonds in Nigeria.
3. Mutual Funds
In this type of investment, a large number of investors pool money together and invest in a large number of companies. The funds are usually professionally managed, and the managers try to beat the market condition by choosing investments that will increase in value. Investors in mutual funds are required to pay an annual fee known as expense ratio, and investors share the profits. Mutual funds are a cost-effective way to invest and are less risky because of portfolio diversification. You can check out our post on investing in mutual funds in Nigeria.
These refer to physical products that range from agricultural products such as maize and wheat to precious metals like gold and silver. Like any other investment, commodities run a risk of value reduction. For example, precious metals lose value if they are not stored well, and weather conditions can also impact the value of agricultural products.
5. Index Funds
These are like a mutual fund only that it passively tracks the financial market index instead of hiring a manager to manage the investments. The funds are considered ideal for individual retirement accounts because the risks associated with them depend on the nature of the investment.
Objectives of Investment
Investment objectives are a set of goals an investor has for his portfolio. They also help a financial advisor or manager determine the best strategy to achieve their client’s goals. The investor needs to make sure he takes certain steps to meet his objectives. Some of the main objectives are;
- Income: Many investors, no matter how conservative they are, want to generate a level of income in their portfolio even if it’s to keep up with inflation. Investing provides another source of getting income without stress.
- Safety: Although there is nothing like a completely safe and secure investment, you can still get close to securing your funds by investing in government or corporate-issued bonds. These securities are arguably the best way to preserve your capital while receiving a specific interest rate.
- Capital Growth: Majority of people invest so they can receive capital gain, and several options offer this benefit. They include bonds, stocks, mutual funds and commodities. Blue-chip stocks are the best to invest in for long term capital growth because they offer reasonable safety and a modest income.
Characteristics of Investments
Below are some of the features you should know
- Risks: Risks could be in the form of capital loss, interest loss, return variability and delay in capital repayment. The lower the creditworthiness of a borrower, the higher the risk. Risks also vary with the nature of the investment. Investing in government securities, and bank deposits are less risky than some other types of investments.
- Returns: The initial expectation of investment is that it will derive returns and the returns from an investment depend on factors such as nature of investment, maturity period and the market conditions.
- Liquidity: Any investment that is readily marketable or saleable without loss of time and money is liquid. Bank deposits, company deposits, P.O deposits are not commercial while others like debentures and preference shares are marketable, but without buyers; hence, their liquidity is negligible.
- Safety: Safety is another feature that guarantees the return of capital without loss of time and money as investors expect to get their wealth on maturity without delay or loss.
Some Other Terms to Know
- Return on investment: ROI is one of the key metrics for evaluating prospective investments. Put in simpler terms; it is a rough estimate of an investment’s profitability. To calculate ROI, use these methods.
ROI= Net income of investment divided/cost of investment x100%
ROI=Final value of investment-initial value of investment/ cost of investment x100%.
- Investment Banking: This is a banking division concerned with the creation of capital for governments, companies and other corporate entities. Some of the functions of investment banks include underwriting debts, selling securities and facilitating mergers & acquisition etc. These banks also offer advice stock issuers regarding their stocks and stock placements.
- Foreign Direct Investment: FDI generally occurs when a firm or individual establishes business operations in a foreign country or acquires assets in an international company. You can make an FDI by expanding your business or obtaining a lasting interest in a foreign country.