What Can You Invest In?
Despite what the ads say about the newest tv or body spray that will attract the ladies there are only three basic types of investments as defined by the dictionary. An investment is something that is purchased with money that is expected to produce income or profit.
This is what people immediately think of when they hear the word investment. This is the most common type of investment and is also the most volatile and profitable. There are four common examples for ownership investments.
This is when you invest in a property that you can rent, or resell after some repairs (this is called flipping if you are an HD TV junky). The most common misconception is calling the house you own an investment. The house you own and you live in provides your basic need for shelter therefore it should not be purchased with profit in mind. This is also why the home you live is subject to more tax breaks than a property you invest in. As an investment you can buy housing, apartment buildings, office buildings, or even wild things like an airport if you think the land will appreciate.
Stocks are the most common type of ownership investment because to investment in a publicly traded company all you need is an investment account with a broker. Stocks encompass all traded securities from options to futures to currency swaps. Purchasing one of these investments means you have a right to a portion of the company’s value. Much of your profit is based on how the market values the asset you own the right to.
There are two approaches to owning a business. The first is entrepreneurship where you invest your time and money to start a company from scratch in order to sell a product or a service. This approach is the hardest path but it offers the biggest returns. The second approach is to buy 100% ownership of an existing business. For example a mechanic buying another mechanic’s garage or when someone sells their deli because they want to retire. If you are really keen you can follow the GE model where you buy a company because you think you can improve it and then a few years later you resell for it for huge gains.
This includes everything that has a market place where the market can establish a value for your items. There is a sports market where that signed Babe Ruth baseball could fetch a lot of money. There is an art market where you hear about art consultants charging a ridiculous fee to establish a value for a piece of art. Then there are precious metals like gold and platinum and jewelry. In order to be an investment you have to plan on reselling these items. This is why calling your wife’s wedding ring an investment is probably not the best idea. These assets are more like real estate than stocks and businesses because these investments require maintenance like cleaning for jewelry, or framing that signed LeBron Jersey. At the end of the day you don’t know how much these will be worth because if LeBron decides to sign a million jerseys after he retires at $50 each then the market will be flooded with LeBron signed gear reducing the value of your investment.
These types of investments are when you become the bank. You are loaning out money to someone in the hopes they will pay you back at a certain interest rate. If you have your money stored in a bank and not a mattress or a hole in your back yard then you are an investor.
This is the lowest risk investment possible and as a result it also offers the least return of usually less than 1% depending on your bank. It is such a safe investment because the FDIC insures accounts at all banks up to $250,000 this was a result of stock market crash in 1929 and The Great Depression. If you have a savings or a checking account you are an investor.
Bonds have a wide variety from tax free municipal bonds (often called Munis in the finance world) to junk bonds which offer a great return because of the risk of the investment. When you purchase a bond you are loaning money to the organization issuing the bond. There are many types of bonds but traditional corporate bonds have coupons which are payments paid out to the bond holder twice a year at an agreed upon coupon rate. As you retire you will get to know bonds well because these are safer investments than stocks but they don’t offer the same great returns that stocks do. Bonds are part of an income generating strategy because of the coupon payments. If you have heard of a CD this is also a type of bond.
The closest thing to cash equivalents is a money market fund. These funds offer a little return usually between 1 and 2%. However depending on the way your money market fund is set up you can generally cash checks out of this fund and make withdrawals from it for those rainy days when you need cash. Currency trading is more of a stock type trade eluding to an ownership investment even though you are just exchanging dollars for another currency you are placing an order in the market and usually doing it electronically through your brokerage. Going to another country and exchanging USD for EUROs isn’t really an investment because you can’t expect a profit.
Looking at our definition of an investment you can’t really invest in a good night sleep by buying new mattress or by using NyQuil. Trying to flip your mattress for more than you purchased it for brand new is a hard challenge and unless you are smuggling NyQuil to countries that ban it (not sure if there are some that actually do) the second hand Nyquil market can’t be that profitable. Remember to qualify as an investment it has to be something that you exchange money for that you expect to make a profit.
Investing in yourself is a taboo area. Your education is an investment and it’s supposed to help you earn a higher income. Then after you graduate you go out and “sell” your services to a business by interviewing and getting a job. You can invest in classes to help increase you communication skills or to become a notary as well. You can even take the argument as far as investing in a cup of 5 hour energy will increase my output at work. The problem is it’s hard to put a dollar value on all these things or apply supply and demand for what you gained by taking that communication class. This is why it’s so taboo.
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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.