Wealth AdvisorRecognizing the three types of investment Published 4 months agoon April 25, 2019By Vaultz Publisher Share Tweet The word “investment” has become muddled with overuse these days. Referring to a stock or a bond as an investment is still in regular use, but now we hear people make “investments” in almost everything. For instance, we hear young professionals “invest” in a good car, homemakers “invest” in high-end appliances and even students “invest” in top-of-the-line laptops and gadgets.In order to address the challenges of recognizing what an investment is, we will look at the three basic types of investment as well as some of the things that are definitely not investments – no matter how the commercial puts it.Investment, as the dictionary defines it, is something that is purchased with money that is expected to produce income or profit overtime. As such, investments can be broken into three basic groups: ownership, lending and cash equivalents. Ownership Investments Ownership investments are what comes to mind for most people when the word “investment” is batted around. They are the most volatile and profitable class of investment. The following are examples of ownership investments:Stocks: A stock is literally a certificate that says you own a portion of a company. More broadly speaking, all traded securities, from futures to currency swaps, are ownership investments, even though all you may own is a contract. When you buy one of these investments, you have a right to a portion of a company’s value or a right to carry out a certain action (as in a futures contract).Your expectation of profit is realized (or not) by how the market values the asset you own the rights to. If you own shares in Apple (AAPL) and the company posts a record profit, other investors are going to want Apple shares too. Their demand for shares drives up the price, increasing your profit if you choose to sell the shares.Business: The money put into starting and running a business is an investment. Entrepreneurship is one of the hardest investments to make because it requires more than just money. Consequently, it is also an ownership investment with extremely large potential returns. By creating a product or service and selling it to people who want it, entrepreneurs can make huge personal fortunes. Bill Gates, founder of Microsoft and one of the world’s richest men, is a prime example.Real Estate: Houses, apartments or other dwellings that you buy to rent out or repair and resell are investments. However, the house you live in is a different matter because it is filling a basic need. It fills a need for shelter and, although it may appreciate over time, shouldn’t be purchased with an expectation of profit. The mortgage meltdown of 2008 and the underwater mortgages it produced are a good illustration of the dangers in considering your primary residence an investment.Precious objects and collectibles: Gold, Da Vinci paintings and a signed LeBron James jersey can all be considered an ownership investment – provided that these are objects that are bought with the intention of reselling them for a profit. Precious metals and collectibles are not necessarily a good investment for a number of reasons, but they can be classified as an investment nonetheless. Like a house, they have a risk of physical depreciation (damage) and require upkeep and storage costs that cut into eventual profits. Lending Investments Lending investments allow you to be the bank. They tend to be lower risk than ownership investments and return less as a result. A bond issued by a company will pay a set amount over a certain period, while during the same period the stock of a company can double or triple in value, paying far more than a bond – or it can lose heavily and go bankrupt, in which case bondholders usually still get their money and the stockholder often gets nothing.Your savings account: Even if you have nothing but a regular savings account, you can call yourself an investor. You are essentially lending money to the bank, which it will dole out in the form of loans. The return is currently quite low, but the risk is also next to nil because of the Federal Deposit Insurance Corporation (FDIC).Bonds: Bond is a catch-all category for a wide variety of investments from Treasuries and international debt issues to corporate junk bonds and credit default swaps (CDS). The risks and returns vary widely between the different types of bonds, but overall, lending investments pose a lower risk and provide a lower return than ownership investments. Cash Equivalents These are investments that are “as good as cash,” which means they’re easy to convert back into cash.Money market funds: With money market funds, the return is very small, 1% to 2%, and the risks are also small. Although money market funds have “broken the buck” in recent memory, it is rare enough to be considered a black swan event. Money market funds are also more liquid than other investments, meaning you can write checks out of money market accounts just as you would with a checking account. What About Investing in Education? Education: Your education is often called an investment and many times it does help you earn a higher income. A case could be made for you “selling” your education like a small business service in return for income like an ownership investment.The reason it’s not technically an investment is a practical one. For the sake of clarity, we need to avoid the absurdity of having everything be classified as an investment. We’d be “investing” every time we bought an item that could potentially make us more productive, such as investing in a stress ball to squeeze or a cup of coffee to wake you up. It is the attempt to stretch the meaning of investment to purchases, rather than education, which has obscured the meaning. But there are many items that are Not Investments!Consumer Purchases: Beds, cars, mobile phones, TVs – and anything that naturally depreciates with use and time – are not investments. As an example, you don’t invest in a good night’s sleep by buying a foam pillow. Unless you’re very famous, and even then, it’s a stretch, since you can’t reasonably expect someone to pay more for your pillow than the initial purchase cost. Don’t take it personally, but there’s very little demand in the second-hand pillow market. Therefore, there is no fourth category of consumer purchases. Admittedly, it’s a clever piece of advertising that removes some of the guilt from impulse purchasing; you’re not spending money frivolously – you’re investing! The decisive test is whether there is a potential to turn a profit. The important word is “potential” because not every legitimate investment makes money.Making money through investing requires researching and evaluating different investments, not simply knowing what is and is not an investment. That said, being able to see the difference between an investment and a purchase is an essential first step. Related Topics: Up NextKnowing your money personality helps to shape financial and life goals Don't MissThe big question: Invest or pay down dept? Continue Reading Advertisement You may like Click to comment Wealth AdvisorKnowing your money personality helps to shape financial and life goals Published 5 days agoon August 15, 2019By Vaultz Publisher Your money style, whatever it may be, can be helpful, but it can also block your progress. Oftentimes we cling to beliefs about money without even thinking about why we hold them.They may be based on your money history. Or, if you’re on your own after a divorce or the death of your spouse, that big transition can greatly impact your money styleLike almost everything else in life, your response to money is largely dictated by your personality. But have you given much thought to how you behave in regard to your finances and how that behavior affects your bottom line? Understanding one’s money personality is the first step that will help one shape his approach to spending, saving and investing. For one to be able to manage his or her finances efficiently, one must understand his money personality.Knowing one’s money personality helps shape one’s attitude towards finances and there are various personalities that every individual fall under when it comes to money personalities.Money personalities have been analyzed in a variety of ways and many people can identify with parts of several of these profiles. The key is to find the type that most closely matches one’s behavior. The major profiles known are: big spenders, savers, shoppers, debtors, and investors.Big Spenders– Statement Makers!Big spenders love nice cars, new gadgets, and brand-name clothing. Big spenders aren’t bargain shoppers; they are fashionable and always looking to make a statement. This often means a desire to have the latest and greatest mobile phone, the biggest 4K television, and a beautiful home.When it comes to keeping up with the Joneses, big spenders are the Joneses. They are comfortable spending money, don’t fear debt, and often take big risks when investing.Savers– the Conservatives!Savers are the exact opposite of big spenders. They turn off the lights when leaving the room, close the refrigerator door quickly to keep in the cold, shop only when necessary and rarely make purchases with credit cards. They generally have no debts and are often viewed as cheapskates.Savers are not concerned about following the latest trends, and they derive more satisfaction from reading the interest on a bank statement than from acquiring something new. Savers are conservative by nature and don’t take big risks with their investments.Shoppers– the Spendthrifts!Shoppers often develop great emotional satisfaction from spending money. They can’t resist spending, even if it’s to buy items they don’t need. They are usually aware of their addiction and are even concerned about the debt that it creates. They look for bargains and are happy when they find them.Shoppers are varied in terms of investing. Some invest regularly through 401(k) plans and may even invest a portion of any sudden windfalls, while others see investing as something they will get to eventually.Debtors– Impulsive Spenders!Debtors aren’t trying to make a statement with their expenditures, and they don’t shop to entertain or cheer themselves up. They simply don’t spend much time thinking about their money and therefore don’t keep tabs on what they spend and where they spend it.Debtors generally spend more than they earn and are deeply in debt while not putting much thought into investing. Similarly, they often miss taking advantage of the company match in their 401(k) plans.Investors – The Frugal! Investors are consciously aware of money. They understand their financial situations and try to put their money to work.Regardless of their current financial standing, investors tend to seek a day when passive investments will provide sufficient income to cover all of their bills. Their actions are driven by careful decision-making, and their investments reflect the need to take a certain amount of risk in pursuit of their goals.In the above narration, every one earning money falls in the various categorization. The big question then is: where do you fall?Once you determine which of these personality types describes you the most and have put some thought into how you approach money, it’s time to see what you can do to make the most of what you have. Making small changes to your personality can often yield big results you least expect.Spenders should Shop a Little Less, Save a Little MoreStatement making becomes a habit that one can easily let go over time. So, if one loves to spend, it’s likely that one is going to keep doing it. But for one to benefit tremendously from this, one should seek long-term value and not just short-term satisfaction. Before one splurges on something expensive or trendy, one should ask himself or herself how much that purchase is going to mean to him or her in a year. If the answer is “not much,” one should obviously skip it. In this way, one can try to limit his or her spending to things he or she will actually use.When one channel his or her energy into saving, one has another opportunity to think long term. Look for slow and steady gains as opposed to high-risk, quick-win scenarios. If one really wants to challenge oneself, consider the merits of scaling back.Savers should Use ModerationBen Franklin once recommended “moderation in all things.” For a saver, this is particularly good advice. Don’t let all of the fun parts of life pass you by just to save a few pennies.Tune-up your savings efforts, too. Pinching pennies is not enough. While minimizing risk is any investor’s prime goal, minimizing risk while maximizing return is the key to investing success.Shoppers should not Spend Money they Don’t HaveA critical step for shoppers is to take control of their credit cards. Unchecked credit card interest can wreak havoc on finances; so think before you spend– particularly if you need a credit card to make the purchase.One should try to focus his or her efforts on saving the money one has. Learn the philosophy behind successful savings plans and try to incorporate some of those philosophies into one’s own. If spending is something one does to compensate for other areas of life that one feels is lacking, think about what these might be and work on changing them.Debtors should Plan their Finances and Start InvestingIf one is a debtor, one needs to get his or her finances in order and set up a plan to start investing. One may not be able to do it alone, so getting some help is probably a good idea. Deciding on who will guide one’s investments is an important choice, so choose any investment professional carefully.Investors: Keep Up the Good WorkCongratulations! Financially speaking, you are doing great! Keep doing what you are doing, and continue to educate yourself.While you may not be able to change your money personality, you can acknowledge it and address the financial challenges that it presents. Managing your money involves self-awareness; knowing where you stand will allow you to modify your behavior to better achieve your financial and life goals. 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