Investment is an asset acquired with the aim of generating more money or making profit. In plain terms, it is allocating money in the expectation of some benefits in the future. The benefit of an investment is called a return. In economic terms, it is purchasing goods that are not meant to be used or consumed at the moment but are left for a period of time in order for them to generate wealth or income. In finance, it is an asset that is bought with the assumption that it will generate more income as time goes by.
Investments are in three divisions: ownership, lending and cash equivalents.
Ownership: This type of investment has to do with being a partial owner of either a company or a property/properties through stocks otherwise known as equity. It also has to do with being a full owner if it is a business or real estate.
- Stocks: Owning stocks which is also known as equity, means that you have partial ownership of a company where those stocks have been bought, no matter how small the stock might be. Stocks give the owner the entitlement to a fraction of the company’s assets and profits that is equal to the amount of stocks owned. There are two types of stock; the common stock and the preferred stock. Units of stocks are known as shares.
- Real estate: Real estate has to do with undeveloped lands, houses, apartment, business complex etc. that are purchased to be used to rent out or resell for more profit. Apart from stock/equity, Real estate is another good investment as land and houses are always in high demand which makes it easier for them to sell at very high rates. However, real estate is very dependent on its immediate surroundings and geographical area.
- Business: The money used to run a business is also considered as an investment. Entrepreneurship is one of the toughest investments because it needs more than just money, it needs time and patience as well. But in totality, it is generally a rewarding investment with really large potential returns.
Lending: This type of investment has to do with lending money to financial institutions through the purchase of bond and through fixed deposit.
- Bonds: According to investopedia, a bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U between the lender and borrower that includes the details of the loan and its payments. Bonds are used by sovereign governments, companies etc to fund operations and projects. Owners of bonds are known as creditors.
- Fixed deposit: Fixed deposit (FD) is a financial instrument used by banks and given to investors which gives them a higher interest rate than a normal savings account until the maturity date. It is also known as a term deposit or time deposit.
Cash equivalents: Just as the name implies, this kind of investments are as good as cash. They have no time duration as regards withdrawal which means that they can be changed or converted back to cash as quickly and as easily. Money markets fall under cash equivalents. They are designed to be low-risk and short term investments. Their maturities are not supposed to be longer than a year and can be as short as a day.
Things that are NOT Investments
There are a lot of things that are considered as investments especially in Nigeria, these things include education, cars, furniture etc.
Education: in Nigeria, education is seen as an investment because it is believed that the amount poured into one’s education will amount to the child or ward excelling greatly in life but in the actual sense it is not. Education does not follow the laid down definition of investment. Education does not generate income for a later date and it cannot be sold for a higher price. Education is not an asset that can generate profit, hence it is not an investment.
Some other items: Flashy and pricey items like cars, beds, mobile phones and other consumer purchases are not investments as these things tend to devalue as time goes on. Things of high essential value; once they have been used, they cannot be sold at a higher price. They become second handed products.
Investment is important as it is a means to build wealth.