Examples of Investment Types

In a financial market, there are many different ways for an investor to invest and achieve growth. As a result, various types of investments may act as tools to help achieve an investor’s financial goals. The most common examples of investment typesInvestment TypesStocks, bonds, and cash equivalents are the three main forms of investments. Investment, in general, refers to the purchase of anything for future use with the goal of generating a regular cash flow or increasing the value of something over time so that it can be sold for a higher price than it was purchased for, i.e. capital gains. read more are as follows:

  • StocksBondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more/ Certificates of Deposit (CDs)CryptocurrenciesCryptocurrenciesCryptocurrency refers to a technology that acts as a medium for facilitating the conduct of different financial transactions which are safe and secure. It is one of the tradable digital forms of money, allowing the person to send or receive the money from the other party without any help of the third party service.read moreReal EstateOptionsOptionsOptions are financial contracts which allow the buyer a right, but not an obligation to execute the contract. The right is to buy or sell an asset on a specific date at a specific price which is predetermined at the contract date.read moreCommoditiesFuturesInvestment fundsBank ProductsAnnuities, etc.

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Top 6 Examples of Investment Types

Let us understand the top 6 types of investment with the help of detailed examples.

#1 – Stock

Companies sell stock and, in return, obtain cash. Selling stock means selling ownership of the company to that extent. Depending on the rights conferred to the investors purchasing stocks, stocks are reclassified as common and preferred.

Investors should diversify their portfolios by investing in various stocks based on their risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more. They shall approach financial advisors if they cannot make a proper investment decision.

Source:  NASDAQ

#2 – Bonds

Bonds are fixed-income instrumentsFixed-income InstrumentsFixed income investment is a type of investment in which the investor receives a fixed and relatively stable stream of income in the form of dividends or interest over a period of time. Companies and governments typically issue fixed investments in the form of debt securities.read more that a company issues in return for cash, and such an issuer of bonds owes the holders of bonds a debt. The issuer has to pay interest and/or repay the principal amount on a later agreed-upon date (maturity).

Let us take the example of Bonds issued by HSBC. HSBC is a British multinational banking and financial services company.

Assume Mr. A purchases a 5-year £1 million HSBC bond with a 5% coupon rate. It means HSBC has to pay Mr. A interest of £5000 every year until five years, and at the end of 5 years, the £1 million has to be repaid.

Consider a three-year bond with a face value of $3000 and a coupon rate of 5% yearly. If the investor holds it till maturity:

  • We will get back the initial value of $3000.Will get 5% interest, i.e., $150 a year.That means the return will be about $150 x 10 = $1500 (ignoring the time valueTime ValueThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more of money)

Sometimes, an investor has to sell his bond for an amount more/ less than what he has purchased it for. It may be because of interest rates, inflation, or credit ratings.

E.g., when an existing bond is offering an interest rate of 4% when the market interest rate goes down to 2%, the bond may be sold for a price higher because it becomes attractive to the other investors to gain a higher interest when compared to the market.

Similarly, when the market rate goes up to 6%, the investor may have to sell it at a lower rate.

#3 – Options

An options contract is an arrangement between two parties where one party agrees to buy/sell a particular asset at a later agreed-upon date. That means this agreement gives the buyer of “option” a right to buy/sell.

Let us understand this type of investment with the help of an example-

Investor B expects a company’s stock price to go up to $100 in the next two months. He sees that he can buy an options contract for the company at $5 with a strike priceStrike PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more of $80 per share. The investor decides to buy 100 shares of the company. So he has to pay $5x 100 = $500.

As expected, the stock price rises to $100, and now B exercises the call option.

He pays $80 x 100= $8,000 for the stock.

The investor can sell such shares at $100 x 100= $10,000 there, realizing a gain of $1,500 ($10,000 – $500 – $8,000).

#4 – Real Estate

Real estate means property, land, buildings, etc. The major benefit of investing in real estate would be that there would be wealth generation using appreciation in the value of the real estate assets. There are majorly four types of real estate:

  • Residential Real EstateExample- houses, condominiums, vacation homes, etc.Commercial Real EstateExample- shopping malls, school buildings, offices, hotels, etc.Industrial Real EstateExample- factories, manufacturing units, buildings used for research, production, storage, etc.Land.

#5 – Cryptocurrencies

Cryptocurrency is a digital currencyDigital CurrencyDigital currency is a currency found only in an electronic form as it is used for trading over the internet. They are famous for allowing transparent and secured digital payments. Although their popularity is constantly growing, their adoption as a reliable alternative to physical money is nowhere close. Some of the popular digital currencies are Ethereum, Bitcoin, and Litecoin.read more with strong cryptography to secure financial transactions and is used to verify and regulate the transfer of funds, generation of currency units, etc.

Examples of Cryptocurrencies investments are Bitcoin, Litecoin, Ripple, Ethereum, Bitcoin Cash, Ethereum Classic, etc.

#6 – Commodities

Commodities’ investment examples include precious metal bullion like gold, silver, and platinum. Energy resources like crude oil and gas; or natural resources like agricultural, wood, timber products, etc.

Many types of investments are available in the market, like the ones stated above. Choosing the right type of investment is very important depending upon the quantum of investment, the investment expectation, and the investor’s risk appetite. Investors must take professional help, avoid investments outside the understanding and diversify their portfolio to reduce the risk to the lowest.

This article is a guide to Investment Examples. Here, we discuss the top 6 types of investment along with examples and detailed explanations. You can earn more about investments from the following articles: –

  • TakafulTop Examples of Call OptionGreen InvestmentsCash InvestmentROI