Understanding Investments By Mark G Darko

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Investing is the act of allocating resources, especially money, with the expectation of generating profit or returns in the future. Investment can be made in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price

An investment is essentially an asset that is created with the intention of allowing money to grow. The wealth created can be used for a variety of objectives such as meeting shortages in income, saving up for retirement, or fulfilling certain specific obligations such as repayment of loans, payment of bills or fees, or purchase of other assets.

Investment may generate income for you in two ways. One, if you invest in a saleable asset, you may earn income by way of profit. Second, if Investment is made in a return generating plan, then you will earn an income via accumulation of gains. In this sense, ‘what is investment’ can be understood by saying that investments are all about putting your savings into assets or objects that become worth more than their initial worth or those that will help produce an income with time.

Financially speaking, an investment means an asset that is obtained with the intention of allowing it to appreciate in value over time.

What is Investment in comparison to Savings?

The question, ‘What is Investment? becomes crucial when asked about savings. Savings simply mean putting aside a part of your earnings over time. The saved amount of money is subject to no risk and, therefore, does not help you earn any profits or returns. However, its value appreciation remains more or less stagnant, as there is no addition over and above what you add each month.

On the other hand, Investment is based on the concept of earning returns or profit on the money you first put in a fund or spent on an asset purchase. Remember here that the involvement of risk is what makes them profitable.

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When understanding ‘what is investment,’ remember that there is a direct relation between returns and risk, meaning more significant the risk involved, higher are the chances of earning greater returns. That is why you must check the risk profile of ‘what is investment?’ about different options, and review your risk appetite before investing.

Categories of Investments

1. Ownership Investments

Ownership investments, as the name clearly suggests, are assets that are purchased and owned by the investor. Examples of this kind of investment include stocks, real estate properties, and bullion, among others. Funding a business is also a kind of ownership investment.

2. Lending Investments

When you invest in lending instruments, you’re essentially behaving like the bank. Corporate bonds, government bonds, and even savings accounts are all examples of lending investments. The money you park in a savings account is basically a loan that you give the bank. This money is used by the bank to fund the loans it gives out to its customers.

3. Near Cash Assets

These are investments that are highly liquid and can easily be converted into cash. Money market instruments, such as treasury bills, fixed deposits and cash placements etc,  for instance, are excellent examples of near cash assets or cash equivalents. Near Cash assets or Cash equivalents generally offer low returns, but correspondingly, the risk associated with them is also negligible. There is always a trade-off between risk and returns

Types of Investments

The question ‘what is investment’ is mostly followed by where to invest. Keeping aside investments in real estate and assets like jewelry and all, when it comes to different instruments, another aspect of understanding ‘what is investment’ is to know about different types of investments. The first refers to equity investments, and the second category includes debt instruments. Equity investments offer greater returns and carry relatively higher risk, while debt instruments are less risky, but offer relatively low returns.

Further, what is Investment can also be understood from the perspective of how they are acquired.

1. Stocks: This includes shares of ownership of any company and helps you earn dividends in return. A buyer of a company’s stock becomes a fractional owner of that company. Owners of a company’s stock are known as its shareholders and can participate in its growth and success through appreciation in the stock price and regular dividends paid out of the company’s profits.

2. Bonds: Wondering what is Investment in terms of bonds? It means lending your money to an institution or government, for which you receive fixed interest at regular intervals and also the face value upon maturity. Bonds are debt obligations of entities, such as governments, municipalities, and corporations. Buying a bond implies that you hold a share of an entity’s debt and are entitled to receive periodic interest payments and the return of the bond’s face value when it matures.

3. Collective Investment Schemes: In this, funds are collected from different investors and put in a company’s bonds or shares, which are managed by fund managers. On understanding what is Investment, you may choose equity funds or debt funds, depending on your risk appetite and capacity. Collective Investment Funds are pooled instruments managed by investment managers that enable investors to invest in stocks, bonds, preferred shares, commodities, etc. The most common types of funds are mutual funds, unit trusta and exchange-traded funds or ETFs. Mutual funds and unit trusts do not trade on an exchange and are valued at the end of the trading day; ETFs trade on stock exchanges and, like stocks, are valued constantly throughout.

Key Issues-

In investing, risk and return are two sides of the same coin, there is always a trade-off between risk and returns; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk.

Risk and return expectations can vary widely within the same asset class; a blue-chip that trades on a prime stock exchange such as NYSE and a micro-cap that trades over-the-counter will have very different risk-return profiles.

The type of returns generated depends on the asset; many stocks pay quarterly dividends, while bonds pay interest every quarter.

Investors can take the do-it-yourself approach or employ the services of a professional fund manager.

Whether buying a security qualifies as investing or speculation depends on three factors – the amount of risk taken, the holding period, and the source of returns.

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MARK G. DARKO

MD-AFRICA, EVRENSEL CAPITAL PARTNERS.

PRESIDENT-GHANA, ASIAN AFRICAN CHAMBER OF COMMERCE AND INDUSTRY.

SENATOR-GHANA, WORLD BUSINESS ANGELS INVESTMENT FORUM.

DIRECTOR-HERITAGE CAPITAL MANAGEMENT LTD, GHANA.

 

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