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The 3 Types of Investment Defined

These days, the term “invest” is being overused. People use it all the time. We hear young professionals “invest” in a good car, homemakers “invest” in high-end appliances and even students “invest” in top-of-the-line laptops and gadgets.

But this time, let’s talk about the three basic types of investment, and later on, a few of those things that are not really considered investments (even if their ads claim them to be).

First, let’s define the term investment It is something purchased with money with the expectation that it will generate profit or income. The three basic types of investment are ownership investments, lending investments, and cash equivalents.

Ownership Investments

This type of investment is what primarily comes to one’s mind when he or she hears the word “investment”. This is considered the most profitable type as well. Some examples of ownership investment include stocks, businesses, and real estate. Collectible items and precious objects may also be considered ownership investments – but only if they are purchased with the intention of reselling them at a higher price to earn a profit. Note, however, that there is a risk of physical depreciation and they almost always require upkeep.

Lending Investments

This type of investment has a lower risk compared to ownership investment because with this, you act as the “bank”. The return is less than that of an ownership investment, though. Take bonds for instance. A bond from a company gives you the assurance that you’ll get a certain amount of money over a specific period of time. During this very same period, stocks can double or even triple in value. However, stocks can also lose really bad and even go bankrupt. Bonds do not come with that risk and bondholders typically get their money and some stockholders end up with nothing.

Cash Equivalents

These are considered to be as good as cash. A good example would be money market funds. Although the return is quite small, the risk is just as small. Compared to other types of investments, cash equivalents are more “liquid”. You can simply write checks from out of money market accounts similar to how you would do with a checking account.

How about all those other items that many call “investments”? Anything that depreciates with use over time, including cars, laptops, appliances, and mobile phones, are not real investments. The determining factor is the potential to profit from your purchase.

Gaining financial growth through investment requires patience and a thorough understanding of the different types of investment and not just their definition. Of course, knowing what makes an investment different from a purchase is a good place to start.