An investment is a way to utilize your cash with the goal of generating future benefit. This future benefit can come in the form of generated income or capital appreciation.
Depositing money in a bank account with interest is an investment that will generate income for you through interest. Buying shares in a company is another form of investment that’s expected to either generate income through dividends or appreciation of the company’s value.
It is important to understand the trade off between expected future benefits and certainty of achieving them. Usually the higher the expected benefits, the less certain you will be able to achieve them.
The expected income you’ll get from interest on bank deposits is probably less than the profits & value appreciation of the business you have invested in. Yet, there is a higher certainty that you will get the bank interest rate than the distributed profits. This is called Expected Return and Expected Risk. The higher the expected return the Higher the expected risk.
Now, let’s look at the most common types of investments:
This is simply putting your money in a bank account that generates interest. Usually the interest rate you get depends on the duration you are willing to commit not withdrawing your funds. For example a certificate of deposit will give you a relatively high interest rate but you can not withdraw your money for a period of 3 years or else you will have to pay an early withdrawal penalty.
A stock (also known as equity) is a security that represents the ownership of a fraction of a company. This entitles the owner of the stock to a proportion of the corporation’s assets and profits equal to how much stock they own. You make money when the value of this company grows or when the company distributes profit. Check our article on the stock market.
Fixed Income Securities
A Fixed-income security is a way for governments and companies to borrow money to finance and expand their operations. In return, they pay periodic interest payments and eventually repay the amount borrowed at a future date
Want to save yourself the time and effort of choosing your investments? Mutual funds allow you to give your money to a group of experts who analyze the market and invest on your behalf.
There are many kinds of mutual funds which include the following:
- Aggressive mutual funds that invest in stocks.
- Conservative mutual funds that invest in fixed income securities.
- Balanced mutual funds that invest in stocks and fixed income securities.
- Thematic mutual funds; fund that invest in tech companies only, others invest in Sharia compliance companies and others invest in Environment Friendly companies only.