Stocks, currencies or commodities are some of the most popular types of investments for people who want to grow their savings
Every day, hundreds of people decide to invest part of their money. But in what? The answer to this question conditions, in many cases, the obtaining of profits. The variety of alternatives can be overwhelming. For this reason, any saver who wishes to multiply their capital needs to know the most common types of investments.
Not all investment products are the same. Far from it. While some focus on offering high returns, others focus on minimizing danger.
For this reason, savers should understand the role played by the four pillars of investment before entering into a transaction. That is, the return they will be able to obtain, the risk they face, the product’s liquidity and the transaction’s maturity date.
In short, there are as many types of investments as investor profiles. And it is this diversity that makes it possible for each of them to find an option that suits their needs. As a result, the same investor can simultaneously opt for different products to diversify his portfolio and reduce the risk level.
But what are the types of investments?
Investments, physical or financial?
When discussing types of investments, this is undoubtedly one of the first division criteria.
First, there are physical investments, also known as economic, productive or real investments. The investor acquires a productive asset: a good through which it is possible to manufacture new goods or start up new services, such as a rented commercial space. This category also includes intangible assets that generate profitability, such as patents or copyrights.
In contrast, the wealth creation associated with financial investments does not derive from producing other goods. In this case, it comes from the exchange in the ownership of that asset, such as stocks, bonds or bills of exchange. Unlike the previous ones, these assets are divisible, and their liquidity is greater since buying or selling them on the market is easier.
Investments, short or long-term?
The types of investments can also be classified according to their life period, taking the year as the measurement system.
If the maturity of the product is less than one year, it will fall into the category of short-term investment. Whether the investor reaps its benefits in 30 or 365 days does not matter. Generally, the profitability of these operations is not usually very high unless it involves a considerable level of risk. The saver who resorts to these types of investments prioritizes liquidity and quick profits. As a result, many financial investments work in the short term.
Long-term investments, on the other hand, have a life expectancy of more than one year. They are very popular among the most patient people who do not prioritize quick profits but are willing to wait longer, trusting their capital will grow over time and multiply its value. For this reason, they tend to offer higher returns than the previous ones. Virtually all physical investments are considered long-term investments.
Investments, fixed or variable income?
Are the returns fixed, or can the returns vary depending on other factors? Depending on this, a distinction can be made between two other types of investments: fixed-income and variable-income investments.
In fixed income, the interest rate is agreed upon and reflected in the contract. The investor, therefore, knows the percentage of profit that corresponds to him before starting the operation. Consequently, the level of risk is very low, but profitability is also sacrificed since this type of investment does not usually offer very juicy profits.
It is an attractive alternative for people who wish to avoid risk as much as possible or those who lack experience in this area, who can opt for instruments such as fixed-term bank deposits.
Variable income, however, is a much riskier option since the investor does not know in advance the return he will obtain, as is the case with shares. Moreover, the returns vary constantly, and although they can be very high, there is also the possibility of the saver losing his money.
It should also be noted that hybrid products have been developed: those that combine the characteristics of these two types of investments. Preferred shares, for example, provide a fixed return for a certain period. However, when this period ends, the variable income is activated indefinitely.
Some of the most common types of investments
When discussing investing, the first thing many think of is the stock market. However, there is a world of options beyond the stock market. The following types of investments meet the needs of all types of investors.
- Stock market: the meeting point between companies seeking financing and savers craving returns. Although fixed-income and equity products can be traded on this market, stocks are the most popular. People buy and sell them, becoming small owners of the companies and making a profit on the difference in the share price at both times.
- Real estate: all those assets linked to land, such as buildings, are considered real estate. Their main advantage is that their value lasts over time: they do not usually depreciate and provide a very large profit to the owners. Therefore, they are one of the safest options and are part of fixed-income investments.
- Bank deposits: in some banks, it is possible to deposit savings in an account so that they remain at the bank’s disposal in exchange for a small interest. Although the owner cannot dispose of them until the term expires, the level of security is very considerable since they are covered. In addition, some firms allow the saver to choose between fixed income or variable income.
- Bonds: through this instrument, investors lend money to a company or a state, buying a part of its debt. At the end of the agreed period, they receive back the original amount and interest. In general, bonds are usually fixed income.
- Foreign exchange market: this is another of the most popular types of investments due to the high liquidity and the brevity of its operations, which usually occur in the short term. Savers buy international currencies, such as the dollar, pound or yen, and sell them at a higher price to make money.
- Mutual funds: these funds, which are usually part of equities, bring together many investors and pool their contributions. A manager, the investment decision-maker, buys different types of assets. In this way, each saver receives a proportional share of the profits, which would be impossible if each person participated individually.
- Pension funds: These operate in a similar way to mutual funds. This collective mechanism pools the savings of a group of people and invests them over the long term in both fixed-income and equity products. However, in most cases, it is not possible to enjoy the gains until retirement age.
- Commodities: gold, silver, oil, metals, grains… Although not the preferred option for beginners, some experienced investors choose to invest in commodities. Like currencies or stocks, their value rises and falls. In this way, people buy and sell the materials, making profits from these operations, framed as equities.
What about alternative financing?
In such a broad spectrum, types of investments aligned with alternative financing also find a space. Thus arise methods such as crowdlending or crowdfactoring, which rely on the power of individuals and multiply the freedom of choice of investors.
Crowdlending works in much the same way as traditional bank loans. Through this system, a group of savers join forces and lend money to a company that no longer depends on banks for financing.
The company enjoys the liquidity it needs but incurs a debt. And at the end of the agreed term, it will have to pay it back, together with interest, which is where the investors’ profit lies.
Crowdfunding also uses a group of savers to support a business financially. But, in this case, their invoices are financed. Investors advance you the amount of the invoices you have not yet received, providing liquidity at crucial moments and preventing your financial stability from jeopardizing.
When the due date arrives, and the customer pays the invoice, the company returns the money to the investors, paying them interest again.
Thanks to the emergence of alternative financing platforms such as Inversa Invoice Market, these mechanisms are accessible to all kinds of companies and investors who can participate in all types of investments.