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What’s an Investment anyway?
By jmh | July 7, 2006
Seems like a silly question, doesn’t it? Well perhaps, but let’s talk about it anyway.
At the most basic level, an investment is anything you can put money into and (hopefully) get a profit from. Based on that definition, many things may qualify: businesses, stocks, precious metals, raw land, real estate, bonds, futures, paper, 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, multi family units, etc. These are different types of real estate investment one could put her hard earned dollar into!
One thing you might be thinking at this point is the number of dollars it takes to get into some of those investments – right? While it does take some dollars to get started, but it really depends on the type of investment. Obviously, some investments are much more cash intense than others. For example, it will take a lot more money to invest in apartment buildings as compared to buying a singe family home or a duplex as an investment.
Might stocks be a bit more straightforward? Well, I don’t know! 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. The 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. Yes, there was a reason for talking about it!
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 faster, when the economy is contracting.
This was a very brief discussion on two commonly available investments. I believe that the more you know, the better your investment choices will be. Ultimately, this will be reflected in what you will achieve as return on your investment, your profit.
©2006 Johanna Hofmann, MBA
Tag: My Investments
Topics: Investments |
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