Though resources are scarce and economic environment continues to bite harder, yet people focused on safeguarding their future, ensure that irrespective of what they earn, a portion of it is kept aside for future use, in a form of investment.
For one to make any form of investment, money must be involved, exchange hands for instrument/s expected to produce future income.
Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit.
Investments can be broken into three basic groups: ownership, lending and cash equivalents.
Meanwhile, it should be internalized that making money through investing requires researching and evaluating different investments, not simply knowing what is and is not an investment.
However, being able to differentiate between an investment and a purchase is an essential first step.
There are three main classes of investments, which however have sub divisions, Andrew Beattie among other experts in their various writings, defined the three types of Investments, as enumerated by the Daily Times Nigeria.
Possession, ownership Investments
This type of investments are investments calls for mind anytime investment is mentioned, yet they are the most volatile and profitable class of investment. Examples of ownership investments are stocks, business, real estate, and precious objects.
Stocks are certificates that gives the owners, right to portion of a company. All traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract.
When one buys one of these investments, he person secures right to a portion of a company’s value. Loss, gain or a right to carry out a certain action in the case of a futures contract.
The stock holders’ expectation of profit is realized or not attained, is based on how the market values the asset.
For instance, if you own shares in GTBank and the bank posts a high profit, other investors will want GTBank shares too and their demand, increasing demand for shares drives up the price, increasing your share price and the profit you will make if you choose to sell your GTBank shares..
Otherwise called entrepreneurship, the money you deploys into starting and running your own business is an investment.
Entrepreneurship as your own boss remains one of the hardest investments to make since it requires more than just money.
It is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes.
Aliko Dangote, president of Dangote group is a key example of successful entrepreneur.
Houses, apartments or other dwellings that one buys to rent out or repair and resell are investments. The house you live in, however, is a different matter because it is filling a basic need.
The house you live in fills your need for shelter and, although it may appreciate over time, it shouldn’t be purchased with an expectation of profit.
The mortgage meltdown of 2008 and the underwater mortgages it produced are a good illustration of the dangers in considering your primary residence an investment.
Precious objects investments include Gold, Da Vinci paintings and a signed LeBron James jersey can all be considered an ownership investment, so far the objects are bought with the intention of reselling them for a profit.
Precious metals and collectibles are however, not necessarily a good investment for a number of reasons, but they can be classified as an investment nonetheless.
Like a house, they have a risk of physical depreciation (damage) and require upkeep and storage costs that eats into eventual profits.
Lending investments are the type of savings that allow you to be the bank. They tend to be of lower risk than ownership investments and also gives less returns as a result.
A bond issued by a company will pay a set amount over a certain period, while during the same period the stock of a company can double or triple in value, paying far more than a bond –
or it can lose heavily and go bankrupt, in which case bond holders usually still get their money and the stockholder often gets nothing.
Having a savings accounts falls under personal finance investment. Even if you have nothing but a regular savings account, you can as well assume the status of investor.
By saving in a bank, you are basically lending money to the bank, which it will dole out in the form of loans.
The return is pitiful, but the risk is also next to nothing because of the Nigerian Deposit Insurance Corporation (NDIC) that guarantees a portion of your savings in the bank.
Bond is a wide-ranging category for a variety of investments in bonds. This form of investment cut across Treasuries, federal government savings bonds, municipal bonds, corporate bonds and international debt issues to corporate junk bonds and credit default swaps (CDS).
The risks and returns from investment in bonds vary widely between the different types of bonds, but overall, lending investments pose a lower risk and provide a lower return than ownership investments.
This is the type of investment that are “as good as cash,” which means they’ are freely reconverted back into cash. Examples of such investments are enumerated below.
Money Market Funds
With money market funds in Nigeria guarantee fixed higher returns which is not so in many advanced economies.
Money market funds are also more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account.
(For more on black swan events, see Black Swan Events and Investing.)
Close, but Not Quite
Your education is called an investment and many times, it does help you earn a higher income. A case could be made for you “selling” your education like a small business service in return for income like an ownership investment.
The reason it’s not technically an investment is a practical one. Andrew Beattie, assessment of this said “while For the sake of clarity, we need to avoid the ad absurdity of having everything be classified as an investment.
We’d be “investing” every time we bought an item that could potentially make us more productive, such as investing in a stress ball to squeeze or a cup of coffee to wake you up.
It is the attempt to stretch the meaning of investment to purchases, rather than education, which has obscured the meaning”
Consumer purchases – beds, cars, TVs and anything that naturally depreciates with use and time- are not considered as investments. For instance, one does not invest in a good night’s sleep by buying a pillow.
Unless one is very famous for such personal belongings to be auctioned for huge sums, it is invariably not rewarding to brand personal effects as investments.
There are three types of investments: ownership, lending and cash equivalents. There is no fourth category of consumer purchases.