Get to know what investment is, types and examples of investments

When we talk about financial education, the concept of investment is one of the first that stands out, because it allows us to grow our money in a more sustainable way over time.

Its benefits are not only reflected in our personal finances, but also in the peace of mind of a healthy and smooth financial future. In this article you will learn everything about investing and how you can get started in this world.

What is an investment?

The definition of investment can be summarized as the action of placing capital or money in an economic activity, project or operation with the aim of obtaining long-term economic returns.

Basically, it is about not consuming the savings or assets that we have in the short term, but putting them to work so that they produce more benefits over time.

This can be done through the purchase of physical objects that are revalued, raw materials, real estate, cryptocurrencies, or investments related to the purchase of shares, investment funds or Exchange-Traded Funds (ETFs).

In this way we make our money work and achieve financial freedom without mortgaging our time.

Fundamental factors of an investment

All investment is governed by four factors that are fundamental to assess whether or not it is convenient to do it. Let’s look at each of them:

Cost effectiveness

It refers to the expected return, that is, the benefit that we expect to have for our investment. This is measured by the percentage of money invested. In addition, profitability contemplates the relationship between the expected return and the risk assumed: that is, the higher the profitability, the higher the risk.

Accepted or assumed risk

This will depend on the profile of the investor, and how he can handle the uncertainty about the return on his investment and the possibility of loss of the invested capital.

For example, the most conservative investors opt for fixed-income products or fixed-term deposits, considering them low risk. Meanwhile, others prefer variable income financial instruments and other investments that give them greater profitability.

Deadlines

Here we look at the time horizon of the investment, that is, if it is short, medium or long term. Take into account that an investment extended over time generates better returns than those made in the short or medium term.

A clear example of this could be short-term bonds or government bonds, which are also considered a safe investment instrument because they are covered by several countries.

Liquidity

At this point we analyze how long we can recover our investment and what is the cost that we will have to convert it into cash. For example, fixed-term deposits allow us to know when we will redeem that investment and ensure a certain level of interest and short maturities.

Types of investment and examples of each

There are several investment options and in recent years many have become popular, their classification depends on the time in which the return is obtained, so they are divided into short, medium and long-term investments.

The first have a maximum period of one year and offer fixed and secure terms. In this article we will focus on the long-term ones:

bonds

This is a type of fixed income investment, where the investor places capital for several years, with a maturity of between 3 and 30 years, depending on the conditions of the debt, and receives a previously established fixed annual amount of return.

The bonds can be public, that is, issued by the State and in this case are considered low credit risk, or private investment. By buying a bond, the investor is a creditor of a portion of the debts of institutions or governments.

It is more recommended for conservative investor profiles.

An example is the ‘M’ bonds, issued by the Mexican Federal Government, which pay interest every six months: this rate is pre-established since they are issued and is maintained over time.

Actions

This is one of the most popular types of investments and is the one usually chosen by those who start in this world. However, it is necessary to have the appropriate advice or the appropriate knowledge to choose well where to put the money and when to do it.

And it is that if the company in which you invest grows and its value increases, you obtain returns when you sell your shares. But if the opposite happens, you could suffer losses.

In the case of stock market shares, they are grouped into indices according to the capitalization of the companies.

investment funds

Investment funds are vehicles that take the capital of various investors and invest it in a portfolio of instruments according to the fund’s strategy. There are investment funds focused on fixed, variable or alternative income instruments.

They tend to be actively managed, meaning that the strategy is executed by investment professionals who decide what to invest in and seek to achieve returns above the overall market for fund investors.

For example, at GBM we have GBMINT, a fund whose strategy is focused on companies in the US market. The team that manages it decides specifically which companies to invest in to achieve higher returns compared to the United States stock market.

Investment trusts

It is one of the financial instruments with the most transparency in its management. It mainly helps to carry out estate planning and works through a third party that offers protection to our assets or money and in turn ensures that these funds are used correctly to offer us greater performance.

The assets that are managed in this type of trust can be real estate, cash resources, securities, insurance policy rights and shares, among others.

Raw Materials

This is one of the investment options for those more expert profiles, because knowledge of the different markets is needed. They can place capital in the agricultural or livestock sector, as well as gold or oil.

All these types of investment are valid and each one has its advantages. The important thing when choosing where to place your financial resources is that you are well advised, sure of the step you are going to take and that you choose according to your investor profile.

Differences between saving and investment

From a financial point of view, saving and investing are not the same. Saving is giving up the disbursement of your money in the present to save it and use it in the future. In general, it is saved without taking risks, but you should know that your money loses value over time due to inflation.

Starting from that definition of savings, let’s see the differences with investment:

When investing we obtain a good or financial assets and we hope to obtain returns.
In investment there is risk and for that reason there is compensation, in saving there is no.
With savings you stop earning money.
In investment, profitability can be uncertain.
With savings, the possibility of having cash is immediate, with investment it will depend on the liquidity of the investment, since you can choose daily liquidity instruments, such as Smart Cash.
With savings you will always have the same amount of money, while with investment there is the possibility of having returns.

Originally posted 2023-01-31 12:01:35.