The word investment has become muddled with overuse. A stock or a bond is an investment. People are now encouraged to make investments in their educations, their cars, and even their flat-screen TVs. All of these things may make sound financial sense, but they are not, strictly speaking, investments.
No matter what the commercials say, there are only three basic categories of investment: ownership, lending, and cash equivalents. They are products that are purchased with the expectation that they will produce income or profit, or both.
- Stocks, real estate, and precious metals are all ownership investments. The buyer hopes that they will increase in value over time.
- Lending money is an investment. Bonds and even savings accounts are loans that earn interest over time for the investor.
- Cash equivalents like money market accounts are easy to liquidate when needed and repay investors with a modest amount of interest.
Defining The 3 Types Of Investments
1. Ownership Investments
Ownership investments are the most volatile and profitable class of investment.
Ownership investments, as the name clearly suggests, are assets that are purchased and owned by the investor. Examples of this kind of investment include stocks, real estate properties, and bullion, among others. Funding a business is also a kind of ownership investment.
2. Lending Investments
Lending money is a category of investing. The risks generally are lower than for many investments and, consequently, the rewards are relatively modest.
When you invest in lending instruments, you’re essentially behaving like the bank. Corporate bonds, government bonds, and even savings accounts are all examples of lending investments. The money you park in a savings account is basically a loan that you give the bank. This money is used by the bank to fund the loans it gives out to its customers.
3. Cash Equivalents
These are investments are "as good as cash," which means that they can be converted back to cash easily and quickly.
These are investments that are highly liquid and can easily be converted into cash. Money market instruments, for instance, are excellent examples of cash equivalents. Cash equivalents generally offer low returns, but correspondingly, the risk associated with them is also negligible.