Financial Investment – Meaning, its Need and Different Types of Investments
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What Is Investing?
Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.
Understanding Investing
The expectation of a return in the form of income or price appreciation with statistical significance is the core premise of investing. The spectrum of assets in which one can invest and earn a return is a very wide one.
Risk and return go hand-in-hand in investing; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk. At the low-risk end of the spectrum are basic investments such as Certificates of Deposit (CDs); bonds or fixed-income instruments are higher up on the risk scale, while stocks or equities are regarded as riskier. Commodities and derivatives are generally considered to be among the riskiest investments. One can also invest in something practical, such as land or real estate, or delicate items, such as fine art and antiques.
Risk and return expectations can vary widely within the same asset class. For example, a blue chip that trades on the New York Stock Exchange will have a very different risk-return profile from a micro-cap that trades on a small exchange.
The returns generated by an asset depend on the type of asset. For instance, many stocks pay quarterly dividends, whereas bonds generally pay interest every quarter. In many jurisdictions, different types of income are taxed at different rates.
In addition to regular income, such as a dividend or interest, price appreciation is an important component of return. Total return from an investment can thus be regarded as the sum of income and capital appreciation. As of March 2019, Standard & Poor’s estimates that since 1926, dividends have contributed nearly a third of total equity return while capital gains have contributed two-thirds.