It is almost impossible to discuss financial growth without the mention of an investment. It is obviously one of the ways to grow your money.
What is an investment is one of the key questions. An investment is the acquisition of an asset or an item with an expectation of gaining proceeds from it.
With this, you have to establish ways you can invest your money. That draws us to our primary question, what are the four types of investment?
Types of investment options
This article explains the 4 main types of investment, with brief information on what each entails as well as the pros and cons.
Equity investments are a means of investment that entails having a part of ownership in an asset or a firm.
They involve stocks in the form of Exchange Traded Funds (ETF’s), mutual funds and individual equities. Returns differ according to the type of stock and the risk involved.
Equity investments have a higher return compared to debt investment. Returns are from the investment’s interest, and the corporation returns when the sales hike or from a rapid rise in profit.
Equity investments normally have very high rates with no limit to their rates.
Why choose an equity investment?
Equity investment is usually made with the prospects of a rise in value through dividends or capital gains. A rise in an equity investment will have the investor earn the rise in monetary value.
This is possible through the selling of the shares or liquidation of the firm’s assets. Furthermore, equity investments help create a strong, diversified portfolio.
Advantages of equity investments:
- It increases the principal amount through dividends and gains
- There is a chance to increase investment through rights shares in the case a corporation intends to add capital to the market. Rights shares offered to existing investors are cheaper than shares sold to the general investors.
- Limited liability as investors are not liable for any failure by the company.
- Ability of the shares to grow.
- It is inflation-hedged, thus protects the value of your investments.
Disadvantages of equity investments:
- High risk involved as there is no collateral provided.
- The investor has no control over the dividends.
- Fluctuation of market prices impacts the dividends.
Debt investments are a popular type of investment that the majority of people have. It is a system used by most banks and Credit unions.
It involves having your money loaned out to borrowers and earning interest from it. That explains why money in your bank account earns a specific amount of interest. Nonetheless, the interest paid is usually small.
Another common type of debt investments that earn more profit are bonds, either long-term corporate bonds or government bonds.
Bonds are a means of financing, with the investor earning a part of the corporation’s shares. For companies that have high credit performance, they have a lower interest rate because of their reliability.
On the other hand, developing companies offer high-interest rates that come with high risks for the investors. For government bond, there are minimal risks involved.
With this type of investment, debt investors have to study carefully the market trend of where they plan on making this investment.
Other types of debt Investments
- Real estate contracts
- Owner financed mortgages
- Property Tax liens
- Loan notes
Advantages of debt investments:
- Your money earns interest.
- It is a low-risk investment.
- It is highly liquid and can be easily converted to cash.
- There is no tax deduction unless one withdraws funds or depending on the investment period.
Disadvantages of debt investment:
- Low returns compared to equity investments.
- Even though debt investment has low risk, there is still a possibility of risks such as lack of liquidity, risk in credit and the risk involved in the change of interest rates.
- Investors have no control over their funds.
- There are several costs involved, such as transaction cost.
This investment differs from the rest when it comes to how you gain returns. Nonetheless, they do have an investment value for life insurance or annuities.
Life insurance offers two plans; a term life or a cash value policy, which you can access after retirement or given to your beneficiaries once one passes on.
Annuities, on the other hand, give you payouts after retirement for the rest of the life. Before investing in any insurance products, understand the plan, the risks and the benefits involved.
Advantages of insurance products
- Acts as security for the insurer.
- It helps in developing the saving habit.
- Protection of one’s business in case of anything.
- Easy access to loans.
- It makes the insurer feel financially protected.
Disadvantages of insurance products:
- The compensation process is complex and involves a long legal process.
- Not all risks are normally compensated.
- The money you receive as payout may be less than all the premiums paid.
Investing in hard assets
This type of investment involves tangible property with a high value that does not bear the risks of bankruptcy or debt default.
That, however, does not mean that they have no risks at all. Hard assets have their share of risks, especially with a volatile market. The most common hard assets are real estate.
Real estate estimates its value on the piece of land, the constructions and rent from the tenants.
Commercial property and house flipping fall under the real estate investment category. Like any other investment, hard assets investment has an expectation of yielding value from it.
Other examples of hard assets
- Valuable metals
Advantages of hard assets
- Hard assets are valuable or can also be a means of producing something valuable.
- It is not complex to understand as soft assets like stocks.
- It does not lose its value overnight like soft assets.
- The assets are in the control of the investors.
- Can offer a long-term source of income example, rentals.
Disadvantages of hard assets
- Their returns may not be as long-term as soft assets as the value may depreciate with time.
- It is only accessible locally and has no exposure to the global market.
- They are harder to sell than soft assets.
- They require high maintenance that may involve more expenses.
- It has a higher liability financially and legally as compared to soft assets.
Its time you started investing
Getting all the information you can on the kind of investment you would like to make is an essential thing you can do before investing money.
In addition, another important thing is having a precise evaluation and understanding of all involved risks.
You can save a lot by studying past patterns with regard to investments. Nothing beats experience.