What is investment? How does it work? Does it really make sense to spend money on something if you can do without it? Investment is not about buying or selling, it’s simply investing in the future. To invest simply means to put money into an investment with the hope of some future benefit/reward in return. Simply put, to invest simply means having or purchasing an asset with the intent of making some money from the future appreciation or an increase in value of that asset over some period of time
Investment can take many forms and there are many different ways to invest and as such there are also many different types of investment. These various forms of investment are commonly known as m1 finance. m1 finance can be broken down into two major categories: Short Term Investments and Long Term Investments. These two major types of investments generally have some common features and the same basic principles.
One way to classify investments is to look at whether the investment is for the current (day-today) or future (day-forever). For example, present day investments can be classified as either ‘current’ or ‘non-current’. Short term investments, by definition, are only traded or held for a limited time period and are therefore usually only suitable for small amounts and are hence low risk. As such, they are ideal for start-ups, individuals and companies.
Another way to classify an investment is to look at whether it is for the mutual fund or for individual stocks or bonds. A mutual fund is an association of individual investors where every investor has a share in a basket of securities. Every time an investor buys shares or when new securities are added, his funds are automatically added to this basket. As a result, the funds stay separated and have no connection with each other.
On the other hand, most individual investments are lump sum investments that offer no guarantee on any one security. The main advantage of these investments is that the risk of loss is relatively low due to large number of securities. However, if the market moves against the investor’s position, he has limited ways to recover his losses. The main disadvantage of lump sum investments is that they are not liquid enough. For example, if an investor loses all his cash in a week due to bad market, he does not have access to new securities until the next week when new issues come in.
Lastly, there is another type of investment that we commonly refer to as ‘fixed income investment’ or ‘fixed income securities’. This is the most widely used form of generating income and is considered to be the safest one too. The main advantage of this type of investment is the fact that the price of the security does not fluctuate. The same asset, however, will appreciate or depreciate depending on the economic conditions in general.