What makes an Investment?

Golden Egg InvestmentIt might seem a silly question, but let’s take a look anyway.

At the most basic level, an investment is anything you can put your money into and (hopefully) get a return or a profit back. Based on that definition, many things may qualify: a business, stocks, precious metals, raw land, real estate, bonds, futures, notes, etc. … and the list goes on.

There are many classes of investments and many categories of investments within these investment classes.

Let’s take real estate for example. There is residential real estate, commercial real estate, medical use, raw land, multifamily units, etc. Those are some of the different types of real estate investments you could put your hard earned dollars into!

One thing might cross your mind just about now:  the huge number of dollars it must take to get into some of those investments, right?

No question, it does take some money to get started, but it really depends on the type of investment as to how much you need to get going. Obviously, some investments are much more cash intense than others.

For example, it may take a lot more money to invest in an apartment building as compared to buying a single family home, a duplex or even investing in a few shares of stock.

So is investing in stock then be a bit more straightforward and takes less cash?

Well it’s a bit tricky to make this broad statement across the board. Depending on the type of stock and the value of each share, the amount of money it takes to get started would vary greatly.

There are literally 1000s of stocks to choose from. While there are many different types of stocks, they can be grouped into a few broad categories. These include income, growth, blue chips, small cap, mid cap, large cap and cyclical stocks (the most basic and general categories).

  • Income stocks are simply stocks that produce and distribute income to the investor. This income is typically distributed in the form of dividends and is taxable.
  • Growth stocks are those that have enjoyed a greater rate of growth compared to other companies in the category. Most of those companies produce broadly accepted and consumed products (Coca Cola is a classic growth stock). Companies in this category may or may not pay dividends.
  • Blue chip stocks represent the big players in the markets. These are well known companies with enormous market value. The Dow Jones Industrial, a major market index, tracks 30 of those large, blue chip stocks.
  • The term Cap refers primarily to the size of the underlying company or to a company’s market capitalization. In other words, the size of a company can be measured by taking the total number of stocks issued by that company and multiplying it by the share price. The resulting number will tell you if the company is a small cap (market capitalization less than $500 million), a mid cap ($500 to $1billion) or a large cap stock ($1billion +) company.
  •  Putting your dollars in small cap stock might be riskier than investing it in large cap stocks. And yes, there was a reason for talking about it all!
  • The last group, cyclical stocks, includes issues that can be expected to go up and down in value, in line with business cycles. These companies typically do great when the economy is growing and perform at a lesser rate, when the economy is contracting.

This was a very brief introduction to two commonly available investments; more to follow later!

The amount of money you need to get started with any kind of investment largely depends on the type of investment  considered, your tolerance for risk, your objectives and your overall financial situation.   I strongly believe that the more you learn and the more you know, the greater will be the investment choices open to you.

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