Types of investments

Author: Steven posted in Asset allocation, Investing basics tagged with Investing 101

Although this website is dedicated to buying stocks and bonds, it is important to have an understanding of the different investment possibilities in order to make the choice that best fits your goals, personality and the level of risk you are willing to take. In this article we will briefly describe the most common types of investments.

Most common types of investments

The two main investment categories are securities and property. When you invest in securities, you are investing in debt, ownership or the legal right to buy or sell an ownership.

The most common type of investment in debt is a bond, where you are lending money to the issuer in exchange for a defined interest rate over a specified period of time, at the end of which you will receive back your principal.

The most common type of equity investment is in common stock, which is the main focus of this website. Historically stocks have proven to be the best asset class in providing a rate of return greater than inflation over the long run. There are several types of stock classifications, such as by market cap, by location and by type.

Options, which are a derivative securities (derivative means their value derives from something else, in this case the price of the stock the option is based on), enable the option holder to sell or buy another security at a given price within a certain period of time.

Investing in property involves investing in either real property such as a house or land or investing in tangible real property such as artwork, antiques and gold.

Each investment vehicle has a certain level of risk associated with it. For example, stocks are considered to be riskier than most bonds. Since they are considered to be riskier they have a higher expected rate of return than bonds. Before you invest any money make sure you are comfortable with the level of risk associated with the investment you are considering. The table below summarizes the most common types of investments available to individual investors:

Type Description Example
Short-term instruments Such instruments can be easily converted into cash. Very low risk and widely used for
idle funds waiting to be invested in other long­term instruments
Money market mutual funds
Deposit accounts
US Treasury Bills
Fixed-income securities Provide a fixed periodic return and are very popular when interest rates are high because investors try to lock in the high return rate Bonds
Preferred stock
Convertible securities
Common stock You own equity in a company. Return on Investment (ROI) is based on capital gain (share appreciation) and dividends (if any). You are a residual claimant, meaning that all debt holders must be paid before the equity holders if the company goes bankrupt which is why stocks are generally considered to be riskier than bonds. Apple shares (AAPL)
J&J shares (JNJ)
Citigroup shares (C)
Pfizer shares (PFE)
Expedia shares (EXPE)
Mutual funds Managed by a professional investment manager, a mutual fund uses investors’ money to purchase securities that make up the fund portfolio.
Actively managed Mutual Funds can be a diversified investment but high management costs are often involved.
Passive Index significantly lower costs than actively managed mutual funds
Pimco Total Return (PTTAX)
American Funds EuroPacific Growth (AEPGX)
Fidelity Contrafund (FCNTX)
Vanguard Total US Stock
Market Index Fund (VTSMX)
Derivatives Although derivatives are neither equity nor debt, they “derive” their value from the behaviour of the underlying asset. Stock options are an example of derivatives. Options
Others Several other investment instruments are available, with real property being one of the most popular. Others include tangible goods such as gold and tax-advantaged investments Real estate
Tax-advantaged investments

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