Before knowing the types of investments, you should first know the difference between saving and investing.
Saving means setting aside your money without expecting an increase of the value of the money you save. By saving money in the bank, at least you know that your money would be safer than if you put it under the pillow. Indeed, if we see at a glance, the various savings banks offer interest savings of 1-3% annually. However, if you notice, every year the prices of goods are always up to the percentage that far exceeds the interest savings. If you are aware, actually the money you have decreased in value.
Meanwhile, investing means expect an increase of the value of your money over time, so it will benefit you. The money which expected to increase in value is stored in a form called assets.
Types of Assets
In investing, there are two kinds of assets, namely real assets and financial assets, which can both be considered as an investment vehicle in order to achieve your financial goals. In investing, you should remember that there are always a risk by losing your capital. Therefore, you must know assets you choose to invest.
Real Assets
Real assets are formed assets such as land, houses, gold and other precious metals. Investing in real assets is a common thing to do. For example, you buy a house, and then rent it to get a monthly income. Not to mention when the rented houses have been completed , you can sell and earn profits. You will get many advantages of investing in real assets, because even if the price can go up and down, but in the long term the value tends to increase.
Financial Assets
Financial asset is an asset that its form is not visible, but still has a high value. Generally, financial assets are located in the banking sector and also in the capital market. Some examples of financial assets are money market instruments, bonds, shares, and mutual funds.
Money market instruments are short-term debt securities that are less than one year issued by governments or companies. In return, you as a creditor will get some interest from the initial value of your investment. Generally, interest will be paid at the end of investment period.
Examples of money market instruments are time deposits, bank certificates and promissory notes. In general, money market instruments have a level of investment risk of failing to pay the value of investments and the interest is very low.
Bonds are debt securities issued by governments or companies. Duration of debt on the bonds is more than one year. Bonds traded in capital markets. You are buying bonds will get rewarded with some interest from the initial value of your investment, which is called the coupon. This coupon is usually paid every 3 or 6 months in a year,
Bonds are a low level of investment risk, but the risk is slightly above the money market instruments. The biggest risk faced by you as a holder of bonds is the possibility that the issuer can not repay its debts. Therefore, there are agencies that provide ratings on bonds issued to find out how big the risk of default on the bonds.
Shares is proof of ownership of a company. People who own shares are entitled to the distribution of the the company’s profit, which is called the dividend, in accordance with the percentage of ownership in the company.
In addition, a company’s share price will move following the company’s performance. If the company has a good performance, then the share price will go up so that shareholders will have benefit if you sell shares. Shares are also traded in capital markets and has a high level of investment risk, because there is a risk of bankruptcy of the company so that you can lose money.
In investing in shares, you should find out if the company really has a good performance. You must do the analysis based on financial statements issued by the company, state economic conditions, and other things that simply take up your time. But of course this is comparable to the potential gains.
Mutual fund is a container to collect public funds that is managed by a legal entity called the Investment Manager to then be invested into other financial assets. The funds are deposited in a bank deposit called the custodian bank.
Mutual funds are the solution for people who want to invest in many assets, but have limited funds. This is possible because of funds raised from many party is large enough to then be invested in shares, bonds and money market instruments in accordance with the policies of the Investment Manager.
In addition, the mutual fund is also a solution for you who has limitations in knowledge and information in conducting investment analysis, and for those who do not have enough time to oversee the daily movement of shares and bonds .
This is exactly what I need for my course at university. We have to make a short overview about the different types of investment. Thanks for that post