From, Michael Fischer’s book Saving and Investing: Financial Knowledge and Financial Literacy that Everyone Needs and Deserves to Have!, here is a simple and effective summary of the various investment classes that I reference throughout this blog.
DEBT AND BONDS (FIXED INCOME INVESTMENTS)
The first way that we as savers can interact with users of capital who are looking for funds to grow their business or to undertake a project are through bonds. We can effectively lend them money and they issue a bond, or promissory note to repay our loan with interest at specified times. Our return depends on the ability and willingness of the other party to pay us a return, usually in the form of interest.
EQUITY AND STOCKS
The second way that we as savers can interact with users of capital is via equity (which includes stock investments), where we become owners or part owners of companies. Investing in stocks is cheap and easy and should be a part of any investment portfolio.
MUTUAL FUNDS OR ETF (Exchange Traded Funds)
Funds can provide a way of investing in many investments at once, and often also involve having a professional take the investment decisions. For many of us investing in funds where a professional takes the investment decisions probably makes sense. But there are numerous considerations to bear in mind – some funds never perform well, some funds have higher expenses than others and some funds just replicate an index.
Hedge funds have been spoken about in the press a lot, and for some investors they are a very attractive alternative to mutual funds.
Real estate can be one of greatest sources of wealth; in fact, in many countries, the government incentivises us to buy at least some real estate (for example a home).
Commodities include things like oil, metals, gold and agricultural products and have some very interesting investment properties. Further the provide a good hedge against equity and currency markets.
In theory we could invest in anything. An investment becomes an investment if people buy it and make money over longer periods of time. One thing to bear in mind for some investments is that if it looks to good to be true, then it just might be.