Examples of Investment Types
In a financial market, there are many different ways for an investor to invest and achieve growth. There are various types of investments that may act as tools to help achieve the financial goals of an investor. The most common examples of investment typesInvestment TypesStocks, bonds, and cash equivalents are the three main forms of investments. Investment, in general, refers to the purchase of anything for future use with the goal of generating a regular cash flow or increasing the value of something over time so that it can be sold for a higher price than it was purchased for, i.e. capital gains. are as follows-
- BondsBondsA bond is financial instrument that denotes the debt owed by the issuer to the bondholder. Issuer is liable to pay the coupon (an interest) on the same. These are also negotiable and the interest can be paid monthly, quarterly, half-yearly or even annually whichever is agreed mutually./ Certificates of Deposit (CDs)
- Real Estate
- OptionsOptionsOptions are financial contracts which allow the buyer a right, but not an obligation to execute the contract. The right is to buy or sell an asset on a specific date at a specific price which is predetermined at the contract date.
- Investment funds
- Bank Products
- Annuities, etc.
Top 6 Examples of Investment Types
Let us understand the top 6 types of investment with the help of detailed examples.
#1 – Stock
Companies sell stock and, in return, obtain cash. Selling stock means selling ownership of the company to that extent. Depending on the rights that are conferred to the investors purchasing stocks, stocks are reclassified as common stock and preferred stock.
Investors should diversify their portfolio by investing in various stocks based on their risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation., and if they are not able to make a proper investment decision, they shall approach financial advisors.
Let us take the example of the stocks of Amazon.com Inc. Amazon.com is an e-commerce company headquartered in Seattle, Washington. Let us consider the stock related data of Amazon on three separate days:
- Let us say (hypothetically), Mr. X has purchased 100 shares of Amazon on the 14th of June 2019 at $1859. So Mr. X had to spend 100 x 1859, i.e., $185,900. As the price went up on the 1st of July 2019, he decides to sell them at the end of the day at the closing price of $ 1922.19 and receives 100 x 1922.19, i.e., $192219.
Gain in the above transaction = $192219- $185900 = $6319.
- Let us say (hypothetically), Mr. X has purchased 100 shares of Amazon on the 7th of May 2019 at $1939.99. So Mr. X had to spend 100 x 1939.99, i.e., $193,999. As the price went up on the 1st of July 2019, he decides to sell them at the highest price of $ 1929.82 and receives 100 x 1929.82, i.e., $192982.
Loss in the above transaction = $192982- $193999 = $1017.
#2 – Bonds
Bonds are fixed-income instrumentsFixed-income InstrumentsFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities. that are issued by a company in return for cash, and such an issuer of bonds owes the holders of bonds a debt. The issuer has to pay interest and/or repay the principal amount on a later agreed upon date (maturity).
Let us take the example of Bonds issued by HSBC. HSBC is a British multinational banking and financial services company.
Assume Mr. A purchases a 5-year £1 Million HSBC bond with a 5% coupon rate. This means HSBC has to pay Mr. A interest of £5000 every year until five years, and at the end of 5 years, the £1 Million has to be repaid.
Consider a three year bond with a face value of $3000 and a coupon rate of 5% a year. If the investor holds it till maturity, he/she
- We will get back the initial value of $3000.
- Will get 5% interest, i.e., $150 a year.
- That means the return will be about $150 x 10 = $1500 (ignoring the time valueTime ValueThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment. of money)
Sometimes, an investor has to sell his bond for an amount for more/ less than what he has actually purchased it for. This may be because of interest rates, inflation, or credit ratings.
For e.g., when an existing bond is offering an interest rate of 4% when the market interest rate goes down to 2%, the bond may be sold for a price higher because it becomes attractive to the other investors to gain a higher interest when compared to the market.
Similarly, when the market rate goes up to 6%, the investor may have to sell it at a lower rate.
#3 – Options
An options contract is an arrangement between two parties where one party agrees to buy/sell a particular asset at a later agreed upon date. That means this agreement gives the buyer of “option” a right to buy/sell.
Let us understand this type of investment with the help of an example-
Investor B expects a company’s stock price to go up to $100 in the next two months. He sees that he can buy an options contract for the company at the cost of $5 with a strike priceStrike PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market. of $80 per share. The investor decides to buy 100 shares of the company. So he has to pay $5x 100 = $500.
As expected by him, the stock price rises to $100, and now B exercises the call option.
He pays $80 x 100= $8000 for the stock.
The investor can sell such shares at $100 x 100= $10,000 there realizing a gain of $1500 ($10,000 – $500 – $8000).
#4 – Real Estate
Real estate means property, land, buildings, etc. The major benefit of investing in real estate would be that there would be wealth generation by means of appreciation in the value of the real estate assets. There are majorly four types of real estate-
- Residential Real Estate
Example- houses, condominiums, vacation homes, etc.
- Commercial Real Estate
Example- shopping malls, school buildings, offices, hotels, etc.
- Industrial Real Estate
Example- factories, manufacturing units, buildings used for research, production, storage, etc.
#5 – Cryptocurrencies
Cryptocurrency is a digital currency that has strong cryptography to secure financial transactions and is used to verify and regulate the transfer of funds, generation of currency units, etc.
Examples of Cryptocurrencies investments are Bitcoin, Litecoin, Ripple, Ethereum, Bitcoin Cash, Ethereum Classic, etc.
#6 – Commodities
Commodities investment examples include precious metal bullion like gold, silver, platinum; energy resources like crude oil, gas; or natural resources like agricultural, wood, and timber products, etc.
There are many types of investments available in the market, like the ones stated above. Choosing the right type of investment is very important depending upon the quantum of investment, the expectation from the investment, and the risk appetite of the investor. Investors have to take professional help, avoid investments that are outside the understanding and try to diversify their portfolio to reduce the risk to the lowest.
This has been a guide to Investment Examples. Here we discuss the top 6 types of investment along with examples and detailed explanations. You can earn more about investments from the following articles –