The dictionary describes ‘investment’ as the “action or process of investing money for profit or material result”. Nowadays, the main forms of investment are typically divided into three main categories. Whilst each type constitutes a broad range of different investment options, learning about these three types of investments makes for a good starting point if you’re a newbie to the world of investment. For a glossary of important investment terms, see this list. For an explanation as to the different investment types, see the guide below.
Ownership investments are basically founded upon the idea that whatever you purchase will increase in value over time, allowing you to use it as collateral or eventually sell it for a profit.
A common type of investment ownership comes in the form of stocks – also knows as equity or shares. These are partial ownerships of a company which in turn entitles you to a share of its profit. You may have heard the term ‘venture capital’. This typically involves giving money to a start-up, but some venture capitalist will also effectively buy a right to make decisions in the company.
Real estate investment is an equally common type of ownership investment. If you buy a property and then rent or sell it, you’ve made a real estate investment. Finally, ownership of valuable items is also a form of investment. Vintage cars, rare wine, historical artefacts, art, precious stones or even website domains are some examples of the types of items people commonly invest in. Investing in ‘commodities’ means investing in something which affects the economy – such as oil or coffee.
Lending investments tend to be lower risk and therefore a safer form of investment, but the returns are subsequently smaller. These investments can be described as buying debts that are expected to be repaid – like a bank. If you’ve heard of people talking about ‘bonds’, then they are using a general term for any type of debt investment. You might lend money to a start-up company, which would then gradually pay you back the money on top of whatever they owe you from the fixed interest rate. You could also, for example, cover the tournament buy-in fees for a poker player who, if successful, would then you pay your back the buy-in fee plus a portion of his or her winnings.
Alternatively, you could invest in something called a Certificate of Deposit. You would do this by agreeing, with your bank, to leave your money in a special type of saving account for a fixed period of time – the investment being that you would acquire a greater interest rate on this money than you would from leaving your money in a different type of savings account. Usually, the interest rate does not make up for inflation rates, however, so the return is very low and this is therefore not a particularly popular form of investment. Finally, there’s something called Treasury Inflation-Protected Securities (TIPS). You can buy TIPS from a bank or broker, who would protect your money against inflation whilst providing you with interest pay-outs twice a year (at a fixed rate).
Cash equivalents are a straightforward form of investment. Generally, they are things that can be converted back into cash should the need arise. Money market funds are technically a form of lending investment but the return is low enough for it to be considered a cash equivalent investment. You can see a useful guide to the types of cash equivalent investments on Investopedia.