Many people like to invest, but not everyone knows very well what investing is all about. In this article, we’ll be looking at the four most common types of investments, although we can already tell you that most can be split into two distinct categories: growth and defensive investments.
Growth investments are investments with a higher return rate but higher risk. On the other hand, defensive assets have a much lower risk but also a much lower rate of return.
The first type of investment we’re going to look at is property. Property is a growth investment and is often considered one of the riskiest growth investments. This is due to the housing market volatility; house prices can increase substantially over a short period and then fall just as fast, which is what happened during the 2008 economic crash.
While many people think of property investments as just directly buying property, one can also buy it indirectly through a R.E.I.T. – a real estate investment trust. These investments often specialize in a particular sector, such as residential, healthcare, or retail.
One of the major advantages of investing in property is the rate of return on the investment. The average return for a rental property as of the summer of 2022 was around 11%. However, the volatility of the market means that it’s much more likely that an investment will substantially decline or even go to zero.
Another type of growth investment is stocks and shares. This is what most people think of when they think of investing, but for those who aren’t aware, it’s the act of buying a part of a company.
If the company does well and profits go up, the value of those shares increases, meaning that the investment goes up in value. However, if the company does badly, the share price goes down, as does the value of the investment.
There are two options when one is looking to purchase shares of a company: private or public. A private equity sale is when a company does not offer shares to the public on the stock exchange but offers shares to its employees or private investors.
However, a public sale is when a company is publicly owned and listed on the stock exchange, meaning that anyone can buy shares in the company.
The main advantage of buying shares as an investment is the rate of return one can get. On average, the stock market should return around 10% per year. Having said that, the downside is that it’s hard to know which companies will do well, and it’s easy to lose the investment. It’s important to always research the company one is investing in, find out what they do, and how they do it.
This is sound advice for all areas of life, for example, if you were going to play an online casino game, you’d want to look at a comprehensive guide of the game, so that you can have the rules and return to player explained – this can act as a reference of how much is theoretically expected to get back from the game on average.
It’s the same with shares, one should look at how the company works and what their likely return on investment will be if they invest in a portion of that company.
3. Fixed Interest
We’ve covered growth investments, so let’s look at some defensive investments. A fixed-interest bond investment is a classic example of a defensive investment, as they’re one of the most secure assets you can buy.
A bond is essentially a loan taken out by a government from investors, with the promise of repayment plus a fixed interest rate. A great example of this type of investment is the Federal Treasury bond from the United States government. These bonds are fixed-rate debt securities with a maturity rate between 10-30 years, meaning one would get their full investment back plus interest in that amount of time.
The best thing about investing in bonds and other fixed-interest investments is that they’re one of the safest forms of investment available. It’s extremely unlikely that one would lose money with these investments, so when wanting to keep your money safe, this is one of the most recommended investments.
However, the rate of return isn’t as high as other investments, and the interest rate will vary from country to country. The average rate as of October 2022 is around 5%.
While many people may not consider it an investment, having your money in cash defends against a poor-performing stock market, housing crises, and low-interest rates. A cash investment doesn’t have to be the physical form; keeping cash in a current or savings account is also a form of cash investment.
As nice as it is to have high rates of return by investing in the stock market or buying property, those are illiquid assets, so when in need of money quickly, one would be forced into selling some of those assets with little or no profit. Having cash may help protect some of those other investments, as it would mean having a liquid form of capital for when it would be needed.
While cash is susceptible to inflation, it offers extremely low risk as it’s incredibly rare that cash loses its value. However, the rate of return is extremely low, and if one is not keeping their cash in a savings or ISA account, it’s difficult to see any returns.
There are many different investment types out there, all offering different rates of return and risk levels. It’s important to assess how much risk one can handle before investing and always do their due diligence before investing – even in defensive investments.