In the Financial World, investments are financial products or financial items that have value that is expected to produce favorable future returns for the investor over time. To an individual, an investment is anything that makes you more money down the road, increasing your net worth or equity.
Financial investments can come in various forms. In the general business world, investments can be equipment or inventory. In personal finance, you often hear real estate or deposit accounts (CDs, money market accounts) used as investment vehicles. However, to a more sophisticated financial advisor or investor, there are 4 major types of investments: Mutual Funds, Stocks, ETFs (Exchange Traded Funds) and Bonds. To an investing newbie, these terms can be very confusing. We will try to break them down into simple English for you to understand.
Where Do these Investment "Products" Come From?
Investment management companies (also called brokerages) create Mutual Funds and ETFs for their clients (you, the investor). Stocks and Bonds are created by regular public companies (like Google or Microsoft) as a way to raise money for operations. Bonds can also be created by government agencies to raise money.
How Is Profit Made from the Investments?
Mutual Funds, Stocks and ETFs are products traded (basically meaning bought and sold) in the equities market (also known as the stock market), such as the New York Stock Exchange and NASDAQ (National Association of Securities Dealers Automated Quotations) – the two biggest equities markets in the United States. As the investor, you make profits based on whether the value of the investment increases over time, or from the time it was bought to the time it was sold. Bonds are not traded in the equities market because there is no central marketplace for bond trading; rather, they are traded through individual dealers. By investing in bonds, you make money when the company or agency pays you interest dividends at timed intervals or at maturity when they repay you for the bond plus any interest.
Let's take a deeper look into the 4 types of investments:
- Mutual Funds: A mutual fund collects money from its shareholders into a pool, and invests that money in various financial securities (such as: stocks, money market instruments, bonds, etc.) in order to meet shareholders' investment goals. As an investor, you will then be paid dividends (or the profit made by your shares in the fund). Shares of a mutual fund cannot be transferred between shareholders; instead, if a shareholder wants to sell his share, he has to ask the fund to redeem it for him; if someone wants to buy more shares, he has to ask the fund to issue a new share for him. Typically, the fund will issue or redeem shares on request at the end of each day.
- Bonds : Bonds are securities issued by a business that represent a debt owed by the business to the bondholder. Bonds give the holder the right to receive interest and the final payment of the debt at maturity (the time required to hold the bond before the full interest amount will be paid).
- Stocks : Stocks are securities issued by a business that represent an ownership share in the business. Stocks give the holder the right to receive dividends (or the profits made on the shares), and, if the business is sold, to get the corresponding share of the purchase price.
- ETFs : ETFs are similar to mutual funds, except that they allow shares to be traded between shareholders (through a stock exchange). This means an investor can buy and sell an ETF share at any moment, just like he can buy or sell a share of IBM stock.
Provided by Investments at Go Banking Rates.