Investment

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Investment Classes

What is Investment
An investment is any vehicle into which financial resources can be placed with the expectation of preserving or
increasing value and earning a positive rate of return. An investment can be a security or a property. Individuals invest
because an investment has the potential to preserve or increase value and to earn income. It is important to stress that
this does not imply that an investment will in fact preserve value or earn income. Bad investments do exist.

Return and Risk
Investment can also be seen in the light of risk and returns. This relationship is known as the risk-returns tradeoff.
• Return: the future value amount that can get from an investment activity (reward). Here we have Expected Returns and
Actual Returns.
• Risk: Risk is defined as the chance that the actual return on an investment will differ from its expected. The larger the
return expected, the greater the risk that must be taken. Low-risk investments are those considered safe with respect to
the return of funds invested and the receipt of a positive rate of return. High-risk investments are those which have more
uncertain future values and levels of earnings.

Classes of Investment
Investment maybe classified by
1. The type of Asset you’re investing in, i.e
• Physical Assets: these are tangible items like real estate, gold/jewellery, commodities etc.
• Financial Assets: such as bank products and securities market related instruments
2. Terms of Investment;
• Long Term Investment
• Short Term Investment
3. Risk Level
• High-risk
• Low risk
4. Investment Method
• Direct
• Indirect Investment.

Physical and Financial Assets
A physical asset is an item of economic, commercial or exchange value that has a material existence. They are also known
as tangible liquid asset that gets its value from a contractual claim. Examples are; Real estates, jewellery/gold etc
A financial asset is a tangible liquid asset that gets its value from a contractual claim. Cash, stocks, bonds, bank deposits and
the like are examples of financial assets.
Unlike land, property, commodities or other tangible physical assets, financial assets do not necessarily have inherent
physical worth.

Types of Financial Assets
1. Fixed Income or Debt Securities: promises either a fixed stream of income or a stream of income determined by
a specific formula. Comes in a variety of maturities and payment provisions
• Money market: refers to debt securities that are short term, highly marketable, and generally of very low risk (ex. U.S. Treasury Bills)
• Capital market: includes long term securities such as Treasury Bonds, as well as bonds issued by federal agencies, and local
municipalities, and corporations. Very safe in terms of default risk.
2. Equity or common stock: represents an ownership share in the corporation and is tied directly to the success of the
firm and its real assets. Equity investments tend to b riskier than investments in debt securities
3. Derivative Securities: options and future contracts provide payoffs that are determined by the prices of other assets
such as bond or stock prices. Values derive from the prices of other assets. Primary use is to hedge risks or transfer
them to other parties.

Long-term and Short-term Investments
Long and short term investment covers the period over which an
investment vehicle runs for. A short term investment typically falls
within 1 year to 3 years (i.e debt securities) while long term investment
runs for more than 5 years (i.e equity).

High-Risk and Low-Risk Investments
A high-risk investment is one where the chances of underperformance,
or of some or all of the investment being lost, are higher than average.
These investment opportunities often offer investors the potential for
larger returns in exchange for accepting the associated level of risk.
Low-risk investments are those considered safe with respect to the
return of funds invested and the receipt of a positive rate of return

Direct and Indirect Investment
A Direct Investment involves the purchase of a direct claim on a
security or property. For example, an investment in one share of a
company’s stock provides the stockholder a proportionate ownership in
that company.
An Indirect Investment provides an indirect claim on a security or
property. i.e mutual funds

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Investment

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