WHAT IS A FINANCIAL INVESTMENT?
A financial investment is a fixed sum of money set aside to create a financial gain.
There are four main branches of investments; cash (for example fixed deposits), bonds, real estate, and stocks/shares which are discussed below.
WHAT IS THE DIFFERENCE BETWEEN SAVING AND INVESTING?
Saving is income not spent. The difference between saving and investing is that when you save money it just sits there, when you invest, it grows. When one invests, you can have more money than what you started with as time goes by.
THE MAIN TYPES OF INVESTMENTS
Cash provides reliable short-term access to purchasing power.
Cash investments include money in bank accounts that earn interest, savings accounts, money market accounts, term deposits, etc. Cash investments are normally considered low risk as the investment would not usually depreciate and the interest albeit low is guaranteed.
A bond is a loan by an investor to the bond's issuer. The issuer agrees to pay interest to the investor at a rate known as "coupon rate". At the end of an agreed "loan period", the bond matures and the issuer repay's the investor's principal.
Bonds are normally issued by governments or companies seeking an immediate influx of cash.
Bonds carry a degree of credit risk which is the risk that the bond issuer may default on one or more payments. To help measure credit risk, many bonds are rated by independent agencies such as Standard & Poor's.
A company is able to raise capital through the issue of shares. These can be sold on the stock market and provide a return to investors by paying out dividends or by appreciating in
value, or both. Shares are considered riskier than bonds as there is no guarantee of financial gain. The possibility also exists that an investor can suffer investment losses without any recourse for recovering their money.
A Real estate investment can be described as the purchase of property to generate income. A real estate investment can be in the form of land, buildings, and other tangible property. Real estate investments are normally for the long term and provide large capital gains as they appreciate in value over time.