An investment is an investment of money to generate income or preserve capital. There are financial investments (purchase of securities) and real investments (investments in industry, construction, and so on)
Investment - long-term capital investments in economic sectors within the country and abroad.
People who are engaged in investing are called investors. Anyone can become a private investor — a middle-level manager, a financier, a doctor, a teacher, a student or a pensioner, this does not require special education. For them, this is a way to get additional income. Traders are the opposite of investors; they constantly conduct short-term transactions, this type of activity is their main source of income.
Despite the fact that investments are aimed at making an investor a profit, they are not a guaranteed way to get it. Different investment methods provide different guarantees of income, but in all cases there is a risk that the investor will receive a loss instead of a profit.
Methods of private investment
There are many ways to invest money on the stock exchange. Some do not require deep knowledge of the work of financial markets, while others are handled only by professionals.
The most common items for investment on the stock exchange include:
- Investing in stocks.
- Investments in bonds (government or corporate).
- Investments in precious metals (gold, silver, platinum).
- Investments in exchange-traded funds ETFs or mutual funds.
- Purchase of currency.
- Investments in derivative financial instruments (futures, options, swaps, etc.)
Read more: What are futures: types, features, advantages and risks
For convenience, private investments are divided into groups depending on the timing. There are three of them in total:
- short-term (up to a year);
- medium-term (from 1 year to 3 years);
- long-term (from 3 years and longer).
In our time, two main styles of investing have been formed. The first is passive investment. It is characterized by investments for a long time. This style assumes that a person has invested money, for example, in company shares, and has been holding them for several years without selling them. As a rule, passive investments are made in large raw materials, technological, financial companies — they have a lower risk of a sharp drop in quotations, often such companies pay dividends.
The second style is aggressive investing. This implies that the investor invests money in riskier instruments. For example, in shares not of the locomotives of the industry, but in shares of smaller companies — when the markets fluctuate, such securities grow or fall more strongly (that is, they have high volatility), but due to the same quality, you can earn more. This type of investment requires a deep understanding of the market and a willingness to lose the invested funds.
Read more: Volatility: types, how to track and how to use
How to invest for an individual
An individual cannot trade on the exchange independently. This is done by brokers, and they also act as intermediaries between the exchange and the investor. You need to open a brokerage account, after which the account holder has the opportunity to buy/sell securities .
Brokers also provide the services of a professional manager. Together with specialists, you choose an investment strategy, agree on the conditions under which shares to buy/sell, and then the manager makes situational decisions on your portfolio.
Profitability and risks
Investments have two key qualities that have a direct relationship. This is profitability and risk. The higher the risk associated with the investment, the higher the potential return can be. And vice versa-relatively reliable investments never allow you to count on high earnings.
For example, a bank deposit, which can also be considered an investment, or the purchase of government bonds are low-risk investments. Bank deposits are insured, and in the case of government bonds, the state acts as a guarantor of the return of money. But the return on such investments is also lower than the potential return on shares, which can be affected by a variety of reasons from market to corporate.
To illustrate the relationship between risks and profitability, we can give another example. Bonds with a 10-year maturity bring the buyer more income than, for example, three-year bonds. The following principle applies here: the higher the maturity of the bond, the greater the risk the investor takes on (after all, a lot can happen even with government bonds in 10 years) and, accordingly, the more he needs to be rewarded for this risk.
Read more: Dividends: what is it and how to get them
Investment portfolio and its diversification
The totality of all investments made by an investor is called an investment portfolio. An investment portfolio may consist of shares of a single company, but analysts and experienced investors recommend not to spend all the capital on one security. In order to reduce risks and increase the profitability of investments, the investment portfolio is diversified — that is, investments are divided between different securities.
Even developed economies and large companies inevitably face periods of recession and stagnation . To protect yourself from such situations, the investment portfolio includes not only stocks, but also bonds, deposits, exchange-traded funds. Professional investors add contracts for the supply of goods — futures-to the portfolio.
The most risky, but at the same time the most profitable part of the portfolio includes shares. Exchange-traded funds are a golden mean associated with relatively low risk and high income. The protective part of the portfolio is bonds and deposits, which stabilize the portfolio in case of strong volatility , this is the most reliable part of the portfolio.
In addition to diversification by assets, it is also important to distribute the portfolio by sectors or industries of the economy. The importance of this principle can be clearly seen in a careful study of any economic crisis. During such periods, when some stocks fall, others rise. This creates a balance and allows you to minimize losses.
Read more: How to invest in stocks and what you need to know
What are the types of investments
The concept of investment is not limited to private investments in securities or derivative financial instruments. In a broad sense, the term "investment" can be extended to any investment by an individual or a company, whether it is money, tangible assets or intangible assets.
The main classes of investments:
- Real investments. These include, for example, the purchase of a ready-made business; the acquisition of intangible assets, such as patents, copyrights, trademarks, etc.; construction, reconstruction, major repairs.
- Financial investments. These include the purchase of securities or derivative financial instruments.
- Speculative investments. In this case, the main feature of the investment is the rate on income due to changes in the asset price. The principle of "buy cheaper, sell more expensive"applies. The subject of speculative investments can be stocks, and besides them — currency, precious metals, bonds.
- Venture capital investments. This is what they call investments in young companies for a long time. Venture investments are associated with a high risk of completely losing investments, but they can also bring investors superprofits. An example of a successful venture investment is the investment of the SoftBank fund in a young company Alibaba in 2000. After Alibaba's IPO in 2014, SoftBank's share increased from $20 million to $74 billion. An example of a failed venture investment is the bankruptcy of the Theranos medical project, which attracted at least $500 million from venture investors before its collapse.
- Portfolio investments. These are investments not in one type of asset (for example, a share of a particular company), but in several at once, which are formed in the form of a portfolio of several securities.
- Intellectual investments. This is the name of investing in an intellectual product. Such can be the training of specialists, scientific developments, intellectual property objects, the creative potential of a group of people.
The opposite of investment is divestition. This is what the economy calls the reduction of an asset. Divestition can be called the sale of a part of an existing business — companies do this if they want to focus on the main direction of their activities.
Divestitions can be committed, among other things, for moral and ethical reasons. In recent years, environmental activists have been calling for divestitions of assets related to the oil industry.
Sometimes divestition is the result of antitrust policy. One such case occurred in 1984, when the US authorities ordered the telecommunications corporation AT&T to divide and sell one of the divisions.
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