Investment Basics

As for the first post of Little Money Lab, before we discuss anything else, let’s first look at the investment basics.

What is investment?

Investment is a set of money engaging activities with the expectation of profit. In other words, investment is the use of money in the hope of making more. In business, investment usually refers to buying assets such as equipments, raw materials and so on to produce goods and services in the hope of making more money. In human capitals, people pay for school to acquire new knowledge. In return, they hope to increase their earnings by doing that. In personal finance world, investment involves the activities of buying equities, bonds, GICs and so on to gain income or increase capital, or both.

What are different types of investment?

When it comes to investment, it is natural for people to think of stock market immediately. Equity/stock is an important type of investment. But there are more. Based on the stability of future income, there are two major categories for investment, fixed income and variable income investment.

Fixed income investments include:

• Savings Account: you put money into high interest rate savings account such as ING Direct Savings Account, ICICI Bank Account and so on. You can access to the money whenever you want. It gives you the most flexibility among all kinds of different investments. On the other hand, the return on investment tends to be lowest compared with other investment instruments as well.
• GIC: GIC is a three letter acronym for Guaranteed Investment Certificate. Similar to savings account, you can easily purchase the product in all most all banks. The difference is that the money is usually locked in for three months to five years depending on the term of GIC you purchased.
• Bond: Bonds are long term debt sold to investors by companies. It is is simply an ‘I Owe You’ in which an investor agrees to loan money to a company or government in exchange for a predetermined interest rate. Bonds can be issued by either a company or government.
• Personal Lending: Instead of lending to companies and governments, investors can choose to lend the money to individuals who are typically looking into a relatively cheaper loan to consolidate their debts. The risk associated with personal lending is usually the highest among all the fixed income investments.

For variable income investments, it usually consists of the following:

• Stock: Stock is ownership in a company. It is issued in shares. For example, if you buy one share of GE stocks, it simply means you own a little tiny piece of GE. When people buy stocks, they are looking to either increase the capital by selling the stocks in the future or gain income from dividends by holding the stocks in a long term.
• Mutual Fund: A mutual fund is simply a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. Usually, mutual funds will buy stocks or bonds on the market. The major advantage of mutual funds compared with stocks is diversification. For example, if you have only $2000, you can probably own only stocks for one company. This is very risky to you as you are putting all your eggs in one basket. What if the company stock is down by 20%? In such situation, you will only have $1600 left which is equivalent to negative $400 in return. However, if you buy a mutual fund which invest in 20 different companies with 5% of its money, when one company’s stock price is down 20%, you will be only lose 1% of your capitals compared with 20% as we mentioned previously.
• ETF: Exchange Traded Fund. A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. We will get into details about this later.
• Real Estate: This a very traditional way of investing. People buy a piece of land or a house/condo and hope they can increase their capital by selling them later or to gain income by renting out the house/condo.

Above are some of investment vehicles I can think of. Anything I have missed? If there is, please let me know by leaving me a comment. If you like this post, please share it by clicking on the “Share This” button below.

Thanks for reading.