When we talk about investment, we have to know that there are different types of financial investment. And although investments are intended to make a profit for the investor, they are not a guaranteed way to receive them. The different types of investment allow different forms of profit, but in all cases there is a risk that the investor will obtain losses instead of profits. It should be noted that investments have two key qualities that are directly related: profitability and risk. What investing types exist, and what are their characteristics?
In investment, the greater the risk associated with it, the higher its profitability can be. We should not forget this in finances: the greater the promise of income, the greater the possibility of risk. And vice versa, relatively reliable investments with low or very calculated risk never allow for high profits. However, there are a wide variety of types of financial investments that are easily adapted to the tastes, demands, and needs of different investors.
Financial investments vs. physical investments
Financial investments are investments that are made in securities such as stocks, bonds, bills of exchange, bank deposits, and other financial instruments that allow the investor to make a profit or income. On the other hand, the so-called physical investments, also called economic or real investments, refer to investments in fixed assets and/or production. They can also include the purchase of patents, copyrights, etc. (intangible assets) for subsequent use in producing materials or providing services.
Among the differences between financial and physical investments, we can mention:
- The assets of financial investments are divisible, while most of the assets of physical investments are not. An asset is divisible if the investor can trade a small part of it.
- Financial assets They have more liquidity compared to real assets. Merchantability (or liquidity) is the feasibility of quickly converting the asset into cash without significantly affecting its price. Most financial assets are easy to buy or sell in the financial markets.
- The planned holding period of financial assets can be much shorter than the holding period of most physical assets. Investors who acquire a physical asset generally plan to hold it for an extended period; financial assets can be held for a few months or even a year. The tenure period for investing in financial assets varies greatly and depends on the investor’s objectives and investment strategy.
Active investment vs passive investment
One type of financial investment is an active investment, in which the investor seeks out and chooses assets with the goal of obtaining a return that is higher than the market’s average. On the other hand, passive investment entails trying to stick to the same investment flow and not aiming to exceed the market’s typical profitability limits. In this case, the investor decides not to take risks and goes to safety.
Some of the differences that exist between these two types of investment are:
- The objective of the active investment is to exceed the market index, while the objective of passive investment is to obtain profits from the market.
- Active investment is a practical approach with frequent buying and selling decisions that take most of the flow of information and price fluctuations, while passive investment It’s about investigating, buying, and maintaining investments.
- An active investment has higher transaction and research-related costs than a passive investment.
- Active investment can also lead to greater taxation on capital gains compared to passive investment.
- Active investment carries greater risk and has the potential to generate higher returns compared to passive investment.
- Although both types of investments have benefits, passive investments have generated the most investment flows.
Types of financial investments
Financial investments can also be called portfolio investments. This is because you can invest in several different financial assets at the same time. This set of investments is called a portfolio or investment basket. In this way, the investor seeks to diversify his investments in order to greatly reduce the risk of placing all his capital in a single instrument or product, which, if it fails, could cause him great losses.
Thus, if one of the investments fails and yields losses, the investor will be able to cover the loss with the profits obtained from his other investments. Financial investment cannot be taken lightly; it requires a preliminary evaluation and an exhaustive analysis. All in all, many people make their portfolios aggressive by including risky but predictably highly profitable investments. While others prefer to choose conservative tactics and include safe, albeit low-yield investments in their portfolio,
The types of financial investments are quite diverse, and even if the investor has already traded with bonds, he cannot invest in random shares. Analyzing the effectiveness of financial investments is the main way to understand if a contribution is worth it. Let’s look at some of the main types of financial investment below:
- Fixed-income investments
- Equity investments
- Investments in the stock market
- Investment in foreign currency
- Investment in raw materials
- Investment in real estate
This is a type of investment in which the issuer of the financial instruments in which it is invested is obliged to pay a fixed and periodic income previously established to the investor holding such instruments. In other words, it is an investment with calculated risk and low profitability. Here, the investor negotiates the profitability and the term of the investment before investing. This type of investment is recommended mainly for inexperienced investors who lack sufficient experience.
Equity investments are the opposite of fixed-income investments. In this type of investment, it is impossible to know in advance or guarantee the return on the investment. It is considered a type of risky investment for investors. Since the investment does not guarantee the income or capital, its return can vary without limit: go up and obtain high returns, or even go down until you reach zero.
Investments in the stock market
Investment in the stock market is the process of buying and selling shares or financial instruments within a stock market. Companies use this method when they need extra money to finance themselves or one of their projects. It is a type of investment recommended for beginners because it is easily accessible, and anyone with a small amount of capital can participate and become part of the body of shareholders of these companies.
Investment in foreign currency
Foreign exchange investment is one of the most common and popular types of financial investment in the world due to its high liquidity and the speed of its operations. It is a type of investment that is mostly made in the short term. And it consists of the acquisition of international currencies such as the euro, the dollar, the pound sterling, or the yen, mainly (it does not exclude any other type of currency of commercial value), with the intention of selling them later at a higher price than the purchase price.
Investment in raw materials
The commodity market, which trades actual goods, is where commodities are invested. It involves buying and selling natural elements, which are then used as raw materials to make real, quantifiable items.
Investment in real estate
Real estate outperforms foreign exchange investments. Real estate has always been a great investment. Thanks that real estate appreciates over time. In addition, it allows its owners or investors to make additional profits from their possession. Real estate investments can constitute a fixed income rate.
Does the type of financial investment vary according to age?
Although it is not an established rule, it is common for the types of financial investments to change according to the age of the investors. And the vision of the economy is changing with age and the acquisition of new responsibilities. For example, it is easier to invest in certain types of financial assets when we are younger and more daring than when we get older because we are becoming more conservative, although we are acquiring more experience.
It is generally considered that the best age to venture into the world of finance and start investing is at the age of 25. At this stage of our lives, our aspirations make us consider investments that provide us greater profitability and capital. Risks are not taken as a limitation of investments; the attractiveness of the reward is greater than the fear of possible loss. This will change when you acquire family responsibilities.
As we mature, we become more conservative, and our priorities change. Taking risks with our capital and family assets is no longer feasible. The promise of a large income is no longer so attractive when we weigh the risk. You start to think about investments in terms of a type of fixed returnAs we mature, where the risk is minimal. Thus, age and experience determine the type of financial investment.