What is an Investment?

The best point to begin is with the definition of an investment. An investment is anything that funds are placed into with the purpose of creating income, or with the expectation that its value will increase. The increases in value, or returns, come in two basic forms: income and price appreciation. An example of income could be the periodic interest payment for a corporate bond, while price appreciation can be shown with the increase in the price of stock over time.

Since the value of cash saved in a person's safe does not generate income and does not increase in value, an individuals personal savings does not count as an investment (this assumes that interest is not being paid on the savings).

Types of Investments

When we consider investment vehicle to put our money in we search for the investment that will offer us the greatest benefit. Since individuals judge the benefits of investments differently there are numerous investment vehicles available. Each one is right (or wrong) for different types of people. Depending on a person's reasons for investing the right choice might be a savings account at the local bank offering a guaranteed two percent return, or the common stock of a new, high-tech company that may double in value (or fade away to nothing). The type of investment you choose should be based on numerous personal factors such as your goals, your risk tolerance, and the financial resources you have available.

Definitions common to investing can be found below:

Securities: A security is an investment that represents ownership or evidence of debt. Common types of securities are stocks and bonds. Securities are the items that most people think of when the are considering investments.

Property: Real property, or real estate, is commonly used as an investment vehicle. The value of land and buildings will frequently increase over time. For many people the largest investment they own is their personal home. Property can also include tangible personal items such as antiques, baseball cards and artwork.

Direct Investments: A direct investment is one where the investor purchases a direct claim to a security or property. Examples of this include the purchase of land, a stock certificate or a savings bond.

Indirect Investments: An indirect investment is one made to a portfolio. A portfolio is a gathering of assets managed by another individual or firm. A common example of an indirect investment is a mutual fund.

Debt Instruments: A debt instrument represents money lent in exchange for the promise of repayment with interest. An example of this is a corporate bond.

Equity: Equities represent an ongoing ownership interest in a company or property. The most common type of equity investment is common stock.

Derivatives: Derivatives are securities that are neither debt instruments nor equities. They derive their value from a security that they are associated with. A common type of derivative is a stock option. A stock option is a derivative that allows you to purchase a specified number of shares of common stock at a specified price at a later date.

Risk: In investing risk is defined as the chance that an outcome will differ from the anticipated outcome.

Speculation: Speculation is purchasing high-risk investments with the uncertain hope of extremely high returns.

Domestic Investment: Domestic investments are investments that are made solely within the United States.

Foreign Investment: Foreign investments are those made outside of the United States.

Short-term: A short-term investment is one that matures in less than one year.

Long-term: A long-term investment matures in a year or more, or doesn't mature at all.

Dividends: Dividends are periodic cash payments made from companies to their investors.

Mutual Funds: A diversified portfolio of investments operated by a portfolio manager. Investors of the fund own a piece of the entire portfolio.