Types Of Investments Top 3 Stocks Bonds Cash Equivalents

Types of Investments

Explanation

As stated above, each investment category has many ways of investing. To choose from the above also depends on many factors. While stocks and bondsStocks And BondsA stock represents a collection of shares in a company, entitled to receive a fixed amount of dividend every financial year, mostly called equity. In contrast, bonds are associated with debt raised by the company from outsiders, which carry a fixed ratio of return each year.read more are suitable for long-term growth, cash equivalentsCash EquivalentsCash equivalents are highly liquid investments with a maturity period of three months or less that are available with no restrictions to be used for immediate need or use. These are short-term investments that are easy to sell in the public market..read more are suitable for investors who prefer liquidity over long-term growth.

Stock is an ownership instrument, while bond is a lending instrument.

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Top 3 Types of Investments

As stated above, there are three types of investments that we shall discuss them as follows:

#1 – Stock Investments

Stocks or share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more come with more risk when compared to other types but earning potential is the highest. Stocks are investments that enable the buyer to hold a portion of the Company’s assets and are hence called ownership instruments. Companies issue such investments to raise capital.

The income is low when compared to bonds.

Liquidity of assetsLiquidity Of AssetsLiquidity is the ease of converting assets or securities into cash.read moreLimited LiabilityLimited LiabilityLimited liability refers to that legal structure where the owners’ or investors’ personal assets are not at stake. Their accountability for business loss or debt doesn’t exceed their capital investment in the company. It is applicable in partnership firms and limited liability companies.read moreRight and Bonus sharesCapital gains on buying and selling sharesControl and ownership rightsVoting rights
High RiskLimited ControlNo fixed dividendResidual claim on a dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read moreFluctuation in market prices

#2 – Bond Investments

Lending or loan investments allow the issuer of the investment to borrow from the investors and pay back the same along with interest. They are a safer bet than stocks to investors because they offer definitive interest periodically. The main risk in any instrument is the default risk, which is absent if the amount is lent to the government.

Fixed-rate of interestLesser riskTax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read moreHelps in diversification
Interest rate riskInterest Rate RiskThe risk of an asset’s value changing due to interest rate volatility is known as interest rate risk. It either makes the security non-competitive or makes it more valuable. read more and default riskHolders cannot be owners; they will always lend/creditorsPeriodical payment liability to the issuersIf the rating falls down, it will be harder to liquidate

#3 – Cash Equivalents

These are investments meant exclusively for short-term holding and conversion into cash. They include money market instrumentsMoney Market InstrumentsThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more such as a certificate of deposits, commercial paper, etc. In totality, Cash and cash equivalentsCash And Cash EquivalentsCash and Cash Equivalents are assets that are short-term and highly liquid investments that can be readily converted into cash and have a low risk of price fluctuation. Cash and paper money, US Treasury bills, undeposited receipts, and Money Market funds are its examples. They are normally found as a line item on the top of the balance sheet asset. read more represent a company’s strength and ability to pay off its current liabilities and debts. That means they are highly liquid.

Low risk of defaultRisk Of DefaultDefault risk is a form of risk that measures the likelihood of not fulfilling obligations, such as principal or interest repayment, and is determined mathematically based on prior commitments, financial conditions, market conditions, liquidity position, and current obligations, among other factors.read moreNot dependent on market fluctuationsHighly liquidRelatively safer when compared to other investment instrumentsHelps Company in meeting operating expensesOperating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more
Lower rate of interestLoss of potential revenue due to keeping it idle to meet immediate needsThese instruments struggle to keep up with inflation

Benefits of Investment

Investing is a very important activity that every entity and individual must do, and anything said about its importance would still be less to explain why it is so essential. That said, let us look into the main benefits of investment which throw some light:

#1 – Building of Wealth and Growth

The investors should find and chalk out a plan that suits them the best as per their earning capacity so that the amount invested grows, compounds, and builds in more wealth over time.

#2 – Fighting Inflation

If the amount is not invested due to inflation, there is a decline in the purchasing power of money; hence, over some time, we tend to lose money. To prevent this from happening, we should invest money at a rate higher than the inflation rate in the economy.

#3 – Tax Reduction and Savings

A few investments, like government bonds and local authority bonds, offer tax deductions, resulting in savings.

#4 – Meeting Financial Goals and Objectives

Every entity, an individual, would have some goals and objectives for financial performance and wealth creation. An individual would have a goal to buy a house, a car, jewelry, etc., which would be possible only when money is available to him in the form of investments.

#5 – Cash Inflows even when there are no earnings

Usually, there are times when there are no cash inflows, such as unemployment or retirement, in the case of an individual and non-season for a business. At times like those, cash inflows from investments come in handy.

Conclusion

An investor has a lot of options when it comes to where to put his money, which would benefit him. There are various types of investments, as stated above, like instruments that give ownership rights, investments that make the holders, the lenders, or creditors, and investments that are held so that they are cash alike or can be readily converted to cash whenever required.

Investments help in many ways, like fighting inflation, wealth creation, and meeting requirements. Each type has its pros and cons, which must be analyzed carefully per individual investor requirements.