Investment: How and Where to Invest

An investment is an asset or item acquired to generate income or gain appreciation. Appreciation is the increase in the value of an asset over time. It requires the outlay of a resource today, like time, effort, and money for a greater payoff in the future, generating a profit.

KEY TAKEAWAYS

• An investment involves using capital in the present to increase an asset’s value over time.
• Investment may include bonds, stocks, real estate, or alternative investments.
• Investments can be diversified to reduce risk, though this may reduce the amount of earning potential.

Where to Invest

• Stocks or Equities: A share of stock is a piece of ownership of a public or private company. The investor may be entitled to dividend distributions generated from the company’s net profit. The stock’s value can also grow and sell for capital gains. The two primary types of stocks to invest in are common and preferred.

• Bonds or Fixed-Income Securities: An investment that often demands an upfront investment, and pays recurring interest over time, called a coupon payment. At maturity, the investor receives the capital invested into the bond. Like debt, bond investments are a mechanism for governments and companies to raise money.

• Index Funds or Mutual Funds: Index and mutual funds aggregate specific investments to craft one investment vehicle. An investor can buy shares of a single mutual fund that owns shares of multiple companies. Mutual funds are actively managed while index funds are often passively managed. This means that the investment professionals overseeing the mutual fund are trying to beat a specific benchmark, while index funds attempt to imitate a benchmark.

• Real Estate: Real estate investments are investments in physical, tangible spaces that can be utilized. Land can be built on, office buildings can be occupied, warehouses can store inventory, and residential properties can house families. Real estate investments may encompass acquiring sites, developing sites for specific uses, or purchasing ready-to-occupy operating sites.

• Commodities: Raw materials such as agriculture, energy, or metals are commodities. Investors can invest in tangible commodities, like owning a bar of gold, or choose alternative investment products that represent digital ownership such as a gold ETF. Oil and gas are considered commodities.

• Cryptocurrency: A blockchain-based currency used to transact or hold digital value. Cryptocurrency companies can issue coins or tokens that may increase in value. These tokens can be used to transact with. Cryptocurrency can be staked on a blockchain where investors agree to lock their tokens on a network to help validate transactions. These investors are rewarded with additional tokens.

• Collectibles: Collecting or purchasing collectibles involves acquiring rare items in anticipation of those items increasing in value and demand. From sports memorabilia to comic books, these physical items often require substantial physical preservation, considering that older items usually carry higher value.

Calculating Return on Investment (ROI)

The primary way to gauge the success of an investment is to calculate the return on investment (ROI). ROI is measured as:

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