CJO

Types of Investment
CHAPTER 1: THE INVESTMENT ENVIRONMENT
1. Securities or Property
You have worked hard for your money. Now it's time for you to make
your money work for you. Welcome to the world of investments. - Securities are investments issued by firms, governments, or
There are literally thousands of investments from all around the other organizations that represent a financial claim on the
world, from which to choose. How much should you invest? When resources of the issuer
should you invest, and which investments are right for you? The
answers depend upon the knowledge and financial circumstances of Examples:
each individual investor.
· Common types: stocks, bonds
Investment – any asset into which funds can be placed with the
expectation that it will generate positive income and/or preserve or · Exotic types: Stock Options
increase its value.
- Property consists of investments in real property or tangible
Two forms of Rewards/Returns personal property.

1. Income · Real property – refers to land, buildings, and that

which is permanently affixed to the land.
2. Increased value
· Tangible personal property – includes items such as
Example: gold, artwork, antiques, and other collectibles.

Form of Investment Return

2. Direct or Indirect
Money in savings Periodic interest
account payments · Direct investment

Share of common Dividends - Investor directly acquires a claim on a security or property.

stock
Example:
Question: Is cash placed in a simple checking account an
investment? Buying shares of common stock

ANS: NO, because it fails both test of the definition: It does not · Indirect Investment
provide added income, nor does its value increase. In fact, over time,
inflation erodes the purchasing power money left in a - Investment in a collection of securities or properties managed by
non-interest-bearing checking account. a professional investor.

Example:
Individuals sending their money to a mutual fund company
3. Debt, Equity, or Derivative Securities
· Debt- simply a loan that obligates the borrower to
make periodic interest payments and to repay the
full amount of the loan by some future date.
Example: bond
· Equity- represents ongoing ownership in a business
or property.
· Derivative Securities – neither debt or equity. They
derive their value from an underlying security or
asset.
Example: stock options (it is an investment that grants
the right to purchase (or sell) a share of stock in a
company at a fixed price for a limited time period of time.
4. Low- or High- Risk Investment
● Risk- reflects the uncertainty surrounding the return that a
particular investment will generate
● The broader the range, the greater the risk.
● Low risk investment - provide relatively predictable, but also
low, return
● High investment risks- provide much higher returns, on
average, but also have the potential for much larger losses.
5. Short- or Long Term Investments
● Short- term- typically mature within one year
● Long-term - those with longer maturities, or like common
stock, with no maturity at all.
CJO
Structure of the Investment Process
- Brings together the suppliers (those who have extra funds)
with demanders (those who need funds).
● Financial Institutions- organizations, such as banks and
insurance companies, that pool the savings of governments,
businesses, and individuals and channel them into loans and
other types of assets.
● Financial Markets- forums in which suppliers and demanders
of funds trade financial assets, typically with the assistance
of intermediaries such as securities brokers and dealers.
Suppliers and Demanders of Funds
● Government
- Require vast sums of money to finance long-term
projects related to the construction of public facilities
and to keep the government running.
- Is a net demander (demands more than it supplies)
● Business
- Most business firms require large sums of money to
support operations.
- Issue a wide variety of debt and equity securities to
finance their needs.
 CJO

- Net demanders Major Types of Investments

TYPE DESCRIPTION EXAMPLES

● Individuals
Short term Savings instruments with Deposit
- Demand funds in the form of loans to pay for
lives of 1 year or less. accounts,
property (e.g., houses and automobiles)
Used to warehouse idle savings bonds,
- Net Supplier
funds and to provide Treasury bills,
liquidity. Certificates of
deposits,
commercial
Types of Investors paper, Banker’s
acceptances,
● Individual Investors money market
- manage their own funds to achieve their financial goals. mutual funds
- Concentrate on earning a return on idle funds, building a
source of retirement income and providing security for their Common stock Equity investments that
families. represent ownership in a
corporation

Fixed-Income Investments that make fixed Bonds

● Institutional Investors Securities cash payments at regular Convertible
- Investment professionals who earn their living by managing intervals Securities
other people’s money. Preferred Stock
- Trade large volumes of securities for individuals, businesses,
and governments. Mutual Funds Companies that pool money
- Include financial institutions such as banks, life insurance from many different
companies, mutual funds, and pension funds. investors and invest funds
- Generally control larger sums of money and have more in a diversified portfolio or
sophisticated analytical skills. securities

Derivatives Securities that are neither Options

debt nor equity but are Futures
structured to exhibit the
characteristics of the
underlying assets from
which they derive their
value.
 CJO

Miscellaneous Various other investment Tax-advantaged

vehicles that are widely investments
used by investors Real Estate
Tangibles