Simply Grasp

What is investment? (Part-1)

Planting your Money

Happy day, amazing people!!!

To answer the above question, let me give you an example.

Jackie earns a salary of $ 20,000. From this he takes a portion of $4,000 (20% of $20,000) and keeps it aside as his savings.

These savings can then be invested to earn additional income (interest from fixed deposit) or growth in value (appreciation in land value).

There are number of investment options available which we will be seeing as the article proceeds.

How a good investment should be?

Objective Fulfillment	People’s main reason for investing must be fulfilled. E.g., ·  Kelly starts investing for her children’s college fee ·  Jimmy is investing for his retirement life
Safety	Investors want his/her investment to be safe and sound without any loss or at least to an extend of not losing the principal amount. E.g., Government securities
Return	Investment must fetch good returns but the problem is returns are based on the risk appetite of the investor. More risky investment = More returns Less risky investment = Less returns
Hedge against inflation	Good investment must be able to protect investors from future price rise. Which means expected return percentage (%) from an investment must be more than the prevalent inflation rate in the economy. Note: Cash savings and fixed income investment are bad hedge against inflation.
Tax shield	Must motivate the people to make investments and also to reap benefits from those investment. (Tax reliefs)

Type of investors

Kinds of investments

A} Non-marketable – In this type of investments, any transaction will take place only between two parties, investor and issuer.

Investors can’t sell his/her investment to third party and also can’t buy these investments from third party other than issuer.

Example: Let’s say Fabian decides to invest his money in a bank’s fixed deposit scheme for which he will receive an interest.

Issuer – Bank

Investor – Fabian 

So now Fabian can’t sell his investment to third party and Fabian can’s buy this bank deposit scheme from third party other than bank.

Some of the non-marketable investments are

• Post office deposits
• Company deposits
• Provident fund deposits
• Bank deposits

One drawback with this type of investment is that they have fixed interest rate which is not a very good option for hedge against inflation.

B} Marketable – They are just opposite to non-marketable investments. Buying and selling can happen through many ways because there exist secondary markets.

Example: Fabian decides to buy some shares from a company for which he could either buy it directly from the company through investment banks (Primary market) or through stock exchange broker (Secondary market).

Some of the marketable investments are

• Equity shares – As mentioned earlier, equity shares can be bought through investment banks or through brokers.
• Bonds – Bonds are quite different from equity shares because holding an equity share will make you an owner of the company where as holding a bond will make you a lender of the company.
• Money market instruments – They are basically short-term investments which is for one year or less. Usually, it is for institutional investors. Different types of money market instruments are treasury bills, commercial paper, certificates of deposits.
• Mutual funds – This investment involves large no. of investors who give their money to a fund manager to invest in a large portfolio of stocks and/or bonds.
• Derivate – Derivates are contract whose value is derived from an underlying asset. Different kinds of derivates are options, futures, forwards, and swaps. Example: A farmer enters into a contract with a manufacture to supply 100kg of wheat for $10 each at the end of the month.

Now the contract is called derivate which is based on the underlying asset, wheat. If the price increases by $5 in open market the famer has to suffer a loss of $500 and if the price decreases by $5 then manufacture has to suffer the loss.

Do you know?

With the help of “Rule of 72” we can find out how long will it take for us to double our initial investment at any rate of interest. Just divide 72 by the expected rate of return to find out.

C} Life insurance – Life insurance is also considered as investment. Two parties are involved in this transaction, insurer and insured.

Insurer will promise to compensate for the losses met by insured. For which insured will have to pay a certain sum of money at regular intervals from the time he/she purchased the insurance policy or pay in lump sum (premium).

D} Physical assets – Physical assets are bought with an assumption of capital appreciation (difference between sales price and purchase price). Some of the physical assets include real estate, precious stones, gold, silver, and art objects.

Example: Jack bought a land for $100,000, 5 years ago. Now its value is $300,000 due to urbanization. So, if he decides to sell his land now, he would get a profit of $200,000.

We hope you guys have understood about investments and its types. In the next part we shall discuss about risks associated with investment.

Ok then before signing off

Love what you do, do what you love…. Bye

From,

Simply grasp