We’ve previously talked about key differences between traders and investors.
But what kind of investments do investors make ?
1. Ownership Investments
These are the most profitable yet volatile — higher risk — investment class out there. They include assets such as :
To understand stocks, you first have to understand what a corporation is.
According to Investopedia :
“A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. It is often referred to as a “legal person”.”
So a corporation is legally a person. So when you sue a corporation, you don’t sue its owner or shareholders since this corporation has its own assets — chairs, tables and such that you can find in a corporate office.
But how is that relevant to stocks ?
A company issues shares which are bought by shareholders — see the difference between stock and shares. These shares are a way for a company to raise capital by simply selling them in exchange for money to shareholders.
A business is an investment because starting a business can generate — if successful — huge returns.
You probably know this one since this is probably one of the most thought of when talking about investments. However, it only is and investment when you buy to rent or to renovate and then resell for a higher price.
These include collectibles, paintings and gold and are considered an investment for as long as they are bought with the intention of being sold. However, they need maintenance — same goes for real estate actually — as they can depreciate if not cared for properly.
2. Lending Investments
The name says it all. You basically lend money. It can be done through your savings account — yep, banks owe you money as they don’t actually keep your money in their reserve, see here — or by buying bonds.
Okey, but what’s a bond ?
A bond is a contract where a company or a government borrows money from a lender. Two types of bonds exist.
On one hand, coupon bonds are usually issued by companies which pay interests for the duration of the contract before returning the borrowed money to the lender.
On the other hand, zero-coupon bonds are issued by governments which don’t pay interests for the duration of the contract but usually return a higher amount of money than what was borrowed at the end of it.
3. Cash equivalents
If there’s anything you would want to add or share, please do so in the comment section :). I am learning as I write these articles so don’t hesitate to correct me if I said something wrong.
Additional resources :