The term investment refers to any of the following financial activities: buying or selling of stocks, bonds, mutual funds, real estate, derivatives, and insured funds. To invest is to assign money to an entity for the purpose of a future benefit/gain in the near future. Simply put, to invest simply means possessing an asset or a property with the intent of generating a return on your investment that is either an increase in the value of that asset over a specified period of time or an actual gain in the value of that asset. There are two basic types of assets: fixed and variable. Fixed assets like securities and accounts receivable are typically long-term investments. Valued securities such as treasury bills, commercial paper, and mortgage notes are typically short-term investments.
The value of an asset is usually stated in terms of what it is worth today, not what it might be worth in the future. Fixed rate equity investments (equities that are owned by an entity through a series of loans or other equity investments) are known as ‘fixed rate’ investments. Fixed rate equity investments include money market accounts, U.S. Treasuries, commercial paper, Ginnie Mae notes, and mortgage-backed securities.
Other types of investments include stock options. Stock options are contracts for shares of stock that give the buyer the right, but not the obligation, to purchase a specific number of shares of the underlying stock at a pre-determined price within a specified time. Stock option prices are based on the current stock market value, a widely followed index, or some other indicator of market expectations. A stock option can be either a call or a put option. A call option gives the buyer the right to purchase one share of the underlying stock at a stated price during a specified period of time, called a strike, up to an agreed upon price on or before a designated date. With a put option, on the other hand, you are allowed to sell (sell) one share of the underlying stock during a specified period of time, called an expiration date.
One of the common investment methods used by most investors is through the purchase of mutual funds. Mutual funds are baskets of stocks, bonds, or other securities that are offered to investors at varying frequencies. Like other types of stocks and bonds, mutual funds are subject to the law of supply and demand. Like stocks, when there is a glut of shares available for sale, the prices of the shares will generally increase, but an equally important factor, supply and demand, also affect the value of a mutual fund.
Most bond funds are available only to large institutional investors. Smaller investors typically invest their money in bonds through retirement plans and individual retirement accounts. When an investor invests in bonds, it usually takes the form of a bond purchase, meaning that the purchaser is purchasing a set amount of shares at a pre-determined price. In order to make this purchase, investors need to buy enough bonds that are able to provide a stable income stream over the long term. Bond purchases are typically made on a monthly or quarterly basis.
There are many other investment options available to investors. All of these choices can be very profitable, depending on the preferences of the individual investor. An investor may choose to diversify his or her portfolio by investing in both stocks and bonds, or one or some combination of both. Regardless of which investment option is chosen, every investor must do his or her homework to determine how his or her portfolio will fit the overall financial picture he or she sees in the future, especially after retirement.