Six types of investment instruments
One of the main reasons why investing can be strenuous to many is because there are many options and it can be very intimidating to choose which investment is right for your portfolio.
Some investors try to invest in options that they do not have the savings or income for. Which is why you need to master the principles of successful investing first before picking the investment option appropriate for you.
The following are a few types of investments you can invest in to archive your investment or financial goals.
- Stocks
Stocks are a share which entitles the holder to have partial ownership to the company to which the shares where issued from. There are two main types of stocks or shares which are common stocks or preferred stocks.
Common Stock is a tradable equity issued by a company (issuer) which represents partial ownership of that company.
Preferred Stock is a unique type of equity that grants shareholders priority over common stock when sharing dividends or distribution of assets.
When you invest in stocks, you are buying partial ownership into a public traded company ie Meikles, Cafca etc.
How you earn money: When you invest in stocks you get a dividend it can be regular depending on the type. You are also anticipating the price goes up and so that you sell them at a profit (capital gains).
- Bonds
These are investment securities where an investor lends money to a company for a period of time, in exchange the investor gets regular interest payments. When the bond reaches maturity the bond issuer returns the money to the investor. There are two types of bonds which are corporate bonds and government bonds.
Corporate Bonds are a form of debt security in which the issuing company borrows money from investors to finance projects. They are traded over the counter (OTC).
Government Bonds is basically a fixed income security issued and backed by a countries Federal Government.
How you make money: The company issuing the bonds will pay interest payments and at maturity will return the principal investment made by the investor.
- Mutual Funds
This is a type of investment where money is collected from different investors to invest in various assets including stocks, bonds and money markets. Mutual funds can either be actively managed or passively managed.
Actively Managed Mutual Funds are professionally looked after by Fund Managers, who allocate funds assets and attempt to generate returns for the different investors.
Passively Managed Mutual Funds also known as an index fund is one where by the fund manager has no active strategy to buy or sell assets.
They typically track a market index such as SAP 500 or a particular business sector.
How you make money: Since mutual funds invest in a variety of different types of assets, income is earned from dividends if it’s a stock or interest payments if it’s a bond within the funds portfolio.
- Exchange Traded Funds
These are investments that seek to combine the diversification of mutual funds with the trading versatility of securities
They are comparable to mutual funds in that EFTs invest in a portfolio of securities such as stocks, commodities or fixed income. But they differ in that they are traded on the stock exchange which means their prices fluctuates from day to day.
How you make money: EFTs make money from the collection of investment returns from all the investment portfolio.
- Certificates of Deposit
A certificate of deposit is a savings account that holds a determined amount of money for a determined period of time and in exchange you get interest payments from the issuing bank. This is considered to be the most secure investment option as there is a very low risk of loss. When the predetermined time is over you get your principal back on top of that you get a predetermined interest.
The longer the loan period is the higher the higher the interest payments.
How you make money: You make money from the interest payments that you earn during the period and when the period ends you get the principal back.
- Retirement Funds
This is an investment account with certain tax benefits where the investors invest money for their retirement.
They are a number of retirement plans such as Defined Contribution Plan (DCP) and Retirement Savings Plan (RSP) among others.
They can either be sponsored by the employer which are called Workplace Retirement Plans or by individuals which are individual retirement plans.
How you make money: These can be a vehicle to assist you in investing in the other types of investments as there are no tax being deducted on withdrawal. The obvious way you make money is when you get money during your retirement.
Anele Zifiso Dube is a Chartered Professional Accountant student at CPA BC in Canada +1 (778) 512-4588 or sir_dube@icloud.com-ebusinessweekly
