Investments: Introduction

Let’s begin the post by answering a very basic question: What is an investment?

You may say that anything purchased today at a certain price/amount, anticipating its value to increase in the future and then intending to sell it at a higher price, so as to make a considerable profit is known as an investment. Some of us may also say that anything that earns us money, or money’s worth by means of regular/irregular interest and income can be quoted as an investment. Yes, this is true. But we can simplify the definition a bit. In financial terms, an investment is any asset or item that one purchases in anticipation of profit/earnings or hoping that its value will appreciate in future so as to garner gains to the owner.

Talking about the types of investments, there can be infinite ways to bifurcate anything. Here we will talk of the following three types of investments: Ownership Investments, Lending Investments and Cash Investments.

1. Ownership Investments: These are the ones which come to an individual’s mind as soon as the word ‘investment’ is mentioned. So, when a part or whole of an asset is owned by an individual, expecting an increase in its value in future, it is known as an ownership investment. These are the most risky and volatile types of investments, and hence earn the maximum returns. This type of an investment can be chosen by a risk lover, but aren’t suitable for a risk averter. Examples of ownership investments can be shares, stocks, business ventures, real estate and precious objects.

2. Lending Investments: Lending investments are the ones which allow an individual to function as a bank. In layman terms, we can say that these investments give an investor the liberty to lend money/resources to other individuals, and it fetches them earnings by way of interest. These are safer investment options as compared to ownership investments, as they ensure a fixed regular income, but on the other side, they yield lesser returns. Lending investments are suitable for those who do not prefer to take risks. Some examples for the same can be bonds, saving accounts in a bank and treasury bills.

3. Cash Equivalents: These investments are most easily convertible into cash, hence are known as “as good as cash”. Cash equivalents investments are short term investments, have a high credit quality and are highly liquid. They have a low risk and low return profile, hence suitable for those who want maximum security for their funds. An example for a cash equivalent investment can be money market fund.

For a better understanding of the concept on investments, we also need to answer another question: What is not an investment? Consumer purchases, which don’t usually appreciate, but depreciate in their value over time are not investments. These aren’t considered as investments because they aren’t bought by the owner with an intention to resell them in future, and hence, one cannot expect some other person to pay for a consumer good, an amount which is greater than its purchase price.

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