What types of financial investment exist and what are their characteristics

When we talk about investment, we have to know that there are different types of financial investment. And while investments are intended to bring profit to the investor, they are not a guaranteed way to receive it. Different types of investment allow for different forms of profit, but in all cases there is a risk that instead of profit, the investor may make losses. It should be noted that investments have two key qualities that are directly related: profitability and risk.

In an investment, the greater the risk associated with it, the greater its return can be. This is something that we should not forget in finance, the greater the promise of income, the greater the possibility of risk. And vice versa, relatively reliable investments where the risk is low or very calculated never allow for high profits. However, there is a wide variety of types of financial investments that easily adapt to the tastes, demands and needs of different investors.

Financial Investments vs Physical Investments

Financial investments are investments made in securities such as stocks, bonds, bills of exchange, bank deposits and other financial instruments that allow the investor to obtain profits 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 may also include the purchase of patents, copyrights, etc. (intangible assets) with a subsequent use in the production of materials or the provision of services.

Among the differences between financial and physical investments we can mention:

  1. Financial investment assets are divisible, whereas most physical investment assets are not. An asset is divisible if the investor can trade a small part of it.
  2. Financial assets have more liquidity compared to real assets. Marketability (or liquidity) is the feasibility of converting the asset to cash quickly and without significantly affecting its price. Most financial assets are easy to buy or sell in the financial markets.
  3. The planned holding period for financial assets can be much shorter than the holding period for most physical assets. Investors who purchase a physical asset generally plan to hold it for a long period, financial assets may hold for a few months or even a year. The holding period for investing in financial assets varies widely and depends on the investor’s investment objectives and strategy.

Active investment vs Passive investment

Active investment is one of the types of financial investment in which the investor searches for and selects assets with the intention of obtaining a higher return than the average offered by the market. On the other hand, passive investment consists of trying to stick to the same investment current, where it is not sought to exceed the limits of average profitability offered by the market. In this case, the investor decides not to take risks and plays it safe.

Some of the differences between these two types of investment are:

  1. The objective of active investing is to outperform the market index, while the objective of passive investing is to profit from the market.
  2. Active investing is a hands-on approach with frequent buy-sell decisions made most of by the flow of information and price fluctuations, while passive investing is all about researching, buying, and holding investments.
  3. An active investment has higher transaction and research-related costs compared to passive investment
    Active investing can also lead to higher capital gains tax compared to passive investing.
    Active investing carries greater risk and the potential to generate higher returns compared to passive investing.
  4. Although both types of investments have benefits, it is passive investments that have provided more investment flows.

Type of financial investments

Financial investments can also be called portfolio investments. This is because you can invest in several different financial investment assets at the same time. This set of investments is called a portfolio or basket of investments. In this way, the investor seeks to diversify his investments in order to greatly reduce the risk involved in placing all his capital in a single instrument or product, which, if it fails, could lead to large losses.

Thus, if one of the investments fails and shows losses, the investor will be able to cover the loss with the profits obtained in his other investments. The financial investment is not something that can be taken lightly, it requires a preliminary evaluation and an exhaustive analysis. Still, many people make their portfolio aggressive by including risky, but predictably highly profitable investments. While others prefer to choose conservative tactics and include safe, albeit underperforming, investments in their portfolio.

The types of financial investments are quite diverse, and even if the investor has already traded in bonds, he cannot invest in stocks at random. Analyzing the effectiveness of financial investments is the main way to understand if a contribution is worth it. Here are some of the main types of financial investment:

  • Fixed Income Investments
  • Equity Investments
  • Investment in stock market
  • currency investment
  • Investment in raw materials
  • Investment in real estate

Fixed Income Investments

This is a type of investment in which the issuer of the financial instruments in which it is invested undertakes to pay a previously established fixed and periodic income to the investor holding said instruments. In other words, it is an investment of calculated risk and low return. Here the investor negotiates the profitability and the term of return of the investment before investing. This type of investment is recommended mainly for inexperienced investors who lack sufficient experience.

Equity Investments

Equity investments are the complete opposite of fixed income investments. In this type of investment it is not possible to know in advance the profitability of the investment, nor to guarantee its return. It is considered as a type of risky investment for investors. Since, by not guaranteeing the income or the capital of the investment, its performance can vary without limit: go up and obtain high returns or go down even to zero.

Investment in stock market

Investment in the stock market is the process of buying and selling shares or financial instruments, within a stock market, of companies that use this method when they need extra money to finance themselves or finance one of their projects. It is a type of investment recommended for beginners because it is easily accessible where anyone with a small capital can participate and become part of the body of shareholders of these companies.

currency investment

Investing in currencies is one of the most common and popular types of financial investment in the world due to its great liquidity and the speed of its operations. It is a type of investment that is made mostly 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

Investment in raw materials is also known as the commodity market (tangible goods that can be traded or exchanged for other goods of similar value). And it consists precisely in that, the purchase and sale of materials obtained from nature and converted into assets to which a commercial value is assigned and which are later used as raw material in the manufacture of new products or goods characterized by being tangible and quantifiable.

Investment in real estate

If currency investments are considered a good option, real estate investments are even better. The real estate market is definitely considered one of the best investment options since time immemorial. Thanks that real estate does not lose its value, on the contrary, it appreciates over time. In addition, it allows its owners or investors to obtain additional profits with its possession. Real estate investments can become a type of fixed income.

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 investment to change according to the age of the investors. And it is that the vision of the economy changes 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, since we are becoming more conservative, although we are acquiring more experience.

It is generally considered that the best age to enter the world of finance and start investing is from the age of 25. At this stage of our lives, our aspirations make us think about investments that provide us with 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 acquiring a family responsibility.

As we mature we become more conservative and our priorities change. It is no longer viable to take risks with our capital and family assets. The promise of a great income is no longer so attractive when we weigh the risk. You begin to think about investments more of the type of fixed return where the risk is minimal. In short, there is no doubt that the type of financial investment varies according to age and even more so the experience acquired over time.

Originally posted 2023-02-02 09:51:00.