Everyone has heard of investments and mutual funds, but not every person understands how financial investment works. To put in simple words, financial investment is much like investing in an asset, except that the asset is an intangible one.
People invest with the assumption that is “asset” will have an increment in its value over the next few years. The investor hopes to sell these assets at a higher price in the future.
What are the different types of investments?
Investors usually undertake three basic types of financial investments. They are:
- Shares or Stocks
- Cash Equivalent
The government mostly sells bonds; one can buy a bond and resale it at a higher price a few years down the line.
Companies sell shares and Stocks. Banks pay cash returns.
Returns on Investments
Investments offer various forms of returns. The three main types of return are:
Imagine a basic savings account and the interest you earn from it. The money you keep in the bank earns you an interest, similarly investing in Government Bonds fetches an interest. It can be thought of as an interest that the Government pays to the investors (in bonds) for borrowing their money. The interest rate can vary. One can purchase multiple bonds at the same time and earn a significant amount of interest from them.
Just like the Government pays the investor a certain amount of interest for borrowing the money, so do the companies that sell their shares. The return earned in this case is called dividend. The amount of the dividend depends on the profit made by the company that year. For instance, if a company is paying $5 dividend per share, a person holding 100 shares will earn $500.
This is the increase in the worth of the share over a few years. A person might have bought a share for $5. After 3 years, the value of that share might increase to $10. In this case, there’s been an appreciation of $5. If the shareholder now sells his share, he will earn more than what he paid while purchasing.
Wise investments can be an excellent way to earn money. One can go on earning interests and dividends for years and then sell the share at a much higher price. A prudent investment often leads to a win-win situation.