What is Investment? Beginner’s Guide

Investment Overview

Investment is an act of allocating your physical or non-physical resource with the expectation of a benefit return in the future. It might be your time investment, your money investment or other resource investment.

For example, you invest your time on studying with an expectation to get good marks in your exam or to gain knowledge as a return. Or you invest your energy in gym for getting good Physique. But we are only dealing with money investment in this post.

So, investment is actually allocating your money to buy some asset or an item with the goal of making profit if there is an increase in the value of the asset over a period of time.

But this doesn’t mean that an investor always gets some profitable return. There could be negative return or overall loss of an investment. Let’s understand these scenario with an example.

Consider, you have invested your $100 amount of money in the stock of any company. Let the stock worth of the company has risen to 10% increase after some time from the moment you have invested. 

Now, the current value of your investment is $110 and you have secured a profit of $10 which is a positive return. The Return on Investment (ROI) is :

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ROI  =  [ (Current Value of Investment – Cost of Investment) / Cost of Investment ] x 100%

         =  [ ($110 – $100)/$100 ] x 100%

         =  1/10 x 100%

         = 10%

There are lots of ways to calculate ROI depending on the goal and application but the above is the most common and comprehensive.

Investment and Risk

When there is an investment, there is a risk too.  All investments has certain degree of uncertainty or loss. Different investments have different extent of risk factor like how safe your money will be, how fast it will grow, ease of taking back your money.

Infact risk assessment is one of the important factor to consider while investing your hard earned money.

It is more advisable to invest your money to less risk asset as you are aiming to make money out of it. But here is also a thumb rule : more risk investment gives more money.

Types of risk

business risk

If you buy a stock of a company or its bond and if the company fails and goes bankrupt, its valuation goes down. So the share or bond holder gets heavy loss in their investment. This is a kind of business risk.

Volatility risk

The stock price of a company fluctuates, means goes up and down on regular basis doesn’t matter how secure the company is. Even a fake news can decrease or increase the stock value of a company. These days we are seeing lots of example of this type of fluctuations. So your investment in the stock also goes up and down. No one knows where it would go next days. These types of risks are called volatility risk.

Liquidity risk

If there is a liquidity risk in a particular asset, means there is an non-ease in the buying and selling of the asset or security, it creates risks for investors. It prevents the investor to sell their asset at his/her choice time as there is no purchaser of that asset in the market.

Inflation risk

Inflation in the market reduces the purchasing power. This is a common kind of risk in investment where the investor not receive a fixed rate of interest and it can even erode returns.

Types of Investment

There exists two broader parent categories of Investments. That are :

Fixed-income investments :- This type of income provides a steady stream of income and have comparatively low risk. It generates a steady and fixed level of interest income from your investment. Some examples are Government and private bonds, Treasury bonds etc.

Growth-oriented investments :-  This type is oriented forincreasing the value of the capital over time. It gives high return and has high risk.

The various different types of investments under these two categories are :-

Bonds

It is a kind of Fixed-income investment where you invest by lending money to the company or government for a set period of time in-exchange for regular interests on the investment. You earn interest on your investment amount from the first month of issuing and that interest adds to the bond and increase further compoundly.

Stocks

Stocks are not unknown to anyone these days, everyone hear the word ‘stockmarket’ if he/she is even little interested in investment.

This is a kind of growth-oriented investment where you buy the asset share of an organization whether private or government by paying the amount worth of asset value. You make huge profit in your investment if the share of that organization goes high. It also has risk of reduction in your investment value if the stock prices goes down.

Mutual funds

It is a way a company or organization collects money from various people who are willing to invest in  this scheme and the company or the organization collectively invest this money in various other money making schemes like stocks, bonds, assets etc. The profits then made is shared between the company and the end investors.

Insurance

Insurance is also type of investment that is ideally not done as a intention to make money in future but to get help with money in future when you needed. Here you have to pay regularly your premiums and if some unfortunate happens with you, you will get cover by the Insurer.

Fixed deposit

It is considered as comparatively low risk investment where you deposit a fixed amount of cash to the bank or non-banking financial company (NBFC) for a pre determined tenor. Your money start growing with the addition of interest on your fixed amount. If you withdraw your amount before your tenor, you might get a penalty.

Options

An option is a contract that allows a buyer the right to buy or sell an underlying asset or financial instrument at a specified strike price on or before a specified date. The strike price may be set by reference to the market price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium.

The seller may grant an option to a buyer as part of another transaction, such as a share issue or as part of an employee incentive scheme, otherwise, a buyer would pay a premium to the seller for the option. 

The owner of an option may on-sell the option to a third party in a secondary market, in either an over-the-counter transaction or on an options exchange, depending on the option.

Read more about different types of investment here.

Why you should Invest?

Life is full of unexpectancy. No one knows what would happen in future. Investment makes the future sound economically. Majority of the people don’t invest due to the associated risk in it or due to the lack of technical knowledge associated with it.

But there are lots of investment scheme with very to almost no risk and has good return too. Everyone should take a part of his/her monthly income and invest in it. In return you will get x times more after some time.

Its better to invest in your early life. At your early stage, you don’t have lots of responsibilities and no one expect you to be rich in your early life. So wasting money here and there, you should invest the amount on something that will make your coming years economically strong.

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