Categories of Investment. An investor can invest his surplus funds in different investment alternatives like shares, stocks, bonds, debentures depending upon the investment environment, availability of funds, expected rate of return considering the risk factors involve therein. The ultimate objective of an investor is to learn how to construct an optimal portfolio of investments.
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In order to accomplish, an investor will have to be aware of the various investment alternatives available and be able to make estimates of the returns he expects to get from the individual securities in the portfolio as well as their risk. Securities are marketable financial instruments that bestow on their owners the right to make specific claims on particular assets. Individual security provides evident of either creditor-ship or ownership depending on whether it is a bond or stock respectively. Categories of Investment
Investment Categories
Basically investments involve two categories viz., real assets and financial assets.
Real assets include those assets which are tangible, material things like furniture, land, building, ornaments, automobiles, etc.
Financial assets, on the other hand, include pieces of paper representing an indirect claim to real assets held by individuals or firms or any corporate body. Being pieces of paper, financial assets represent debt or equity commitments in the form of I owe you (IOU) or stock certificates.
Liquidity is one of the special interest to investors distinguishes real assets from financial assets. Obviously, real assets are less liquid than financial assets because the former are more heterogeneous and yield benefits only in cooperation with other productive factors. Moreover, returns on real assets are frequently more difficult to measure accurately. However, our principal concern in analyzing investment is more concern with financial assets rather than real assets. Investors in securities always have an alternative to direct investing. Indirect investing refers to buying and selling of shares of investment companies that, in turn, hold portfolios of securities. Investors purchasing shares of a particular portfolio managed by an investment company are purchasing an ownership interest in that portfolio of securities and are entitled to a pro-rata share of the dividends, interest, and capital gains generated by the portfolio.
A direct investor, however, has the following investment categories:
i. Government securities,
ii. Corporate bonds,
iii. Corporate common stocks,
iv. Preferred stocks and
v. Derived securities
Investments in the above assets may, further, be categorized according to their source of issuance and the nature of the buyer’s commitment as debt instruments and equities. To this end, investments in securities can also be classified on the basis of income or return they earn each year of their life as fixed income securities and variable income securities. Fixed income securities are those which have a defined limited money claim. The money received from those investments will never exceed this promised claim, although they can fall short of promise in the case of default. Variable income securities, on the other hand, have a residual claim to the earnings of a company. These claimants are entitled to whatever is left after all the other security holders have exercised their claims to the firm’s earnings. While the stockholder’s claim to the earnings is residual, it is also unlimited in amount. If the firm proves to be a huge success, the stockholders may reap huge gains, while the bondholders receive only their fixed claim.