Types of Investments
Financial Transaction Assets
To put this in perspective, let’s assume a person, corporation or government needs to access cash to purchase an item, build a new factory or finance a bridge. If they don’t have the cash available to fund the project, they will have to acquire funding in one of two ways:
Borrow the money (a promise to repay) -Loan (Bond).
or
Give up something of value (a piece of “the action”) - Ownership / Equity (Stock).
Loaner
Nothing more than an agreement, normally written on paper, detailing the terms of the loan - how much, when it will be repaid, any requirement for additional compensation (such as interest) and any security pledged in case of default. The terms associated with the various promises to repay are determined in large part by the credibility of the borrower. i.e. Governments would offer less interest generally than a corporation or an individual.
Typical examples:
IOU – usually between trusted individuals.
Bank account – promise to repay you at any time, pays a small return but allows you safety and access through bank premises, debit cards, ATM etc.
Guaranteed Investment Certificates – Financial Institution borrows your cash and promises to repay in a certain time with a specific rate of return.
Bonds – promises to pay issued by Governments, Municipalities, Corporations.
Owner
In many cases it might be difficult to acquire the funding required through borrowing. The entity that requires the funding can offer to give up an amount of ownership in their business or the project being funded instead. The ownership of an asset is called Equity and the actual agreement (generally written on paper) is called a Stock certificate. There is generally no guaranteed return of the invested monies as with a Bond, but there is the opportunity to participate in the profits and fortunes of the business through capital appreciation and distribution of profits (dividends).
Typical examples:
Common – voting rights with dividends that are generally variable not guaranteed.
Preferred – typically pays investors a fixed dividend which are paid to preferred shareholders before common shareholders, including in the case of bankruptcy or liquidation.
Real Assets
Financial assets are promises made on paper. Real assets are physical tangible assets that have intrinsic value due to its substance and physical properties.
Real Estate
Most of us are familiar with the concept of owning real estate. Many own our own homes, investment and/or recreational properties. But Real Estate could also include commercial, Industrial, farm or even vacant land and could have an income (investment) component.
Precious Metals (Bullion)
Since the first human picked up a shiny “rock” we have coveted precious metal not only as a thing of beauty, but as a commodity of exchange (original currency). It is known to be a hedge against inflation and market & geopolitical volatility.
Bullion is gold and silver or other precious metals in the form of bars, ingots or specialized coins.