WHAT ARE THE TYPES OF INVESTMENTS?

FIXED-INCOME AND VARIABLE INCOME INVESTMENTS

Investments can be classified into two forms: fixed income and variable income. Simply stated, fixed income investments promise you a stated amount of income periodically. These include corporate bonds and preferred stocks, U.S. government securities (Treasury bills), municipal bonds, and other savings instruments (savings account, certificate of deposit).

On the other hand, variable income investments are those whereby neither the principal nor the income is contractually set in advance in terms of dollars. That is, both the value and income of variable income investments can change in dollar amount, either up or down, with changes in internal or external economic conditions. These include common stocks, mutual funds, real estate, and variable annuities.

FINANCIAL ASSETS VERSUS REAL ASSETS

Investments can be viewed as financial or real assets. Financial assets refer to intangible investments - things you cannot touch or wear or walk on. They are your equity interest in a company, or evidence of money owed to you, or a right to buy or sell your ownership interest. Real assets have tangible, physical substance. Table 1 lists the various forms of financial and real assets.

TABLE 1
OVERVIEW OF INVESTMENT VEHICLES

Financial Assets Real Assets
1. Equity claims - direct
Common stock
Options, rights, and warrants
1. Real estate
2. Equity claims - indirect
Mutual funds
2. Precious metals and gems
3. Creditor claims
Savings accounts and
certificates of deposits (CDs)
Treasury bills
Money market funds
Commercial paper
Corporate and government bonds
3. Collectibles
4. Preferred stock

5. Commodities and financial futures
6. Annuities - variable and fixed

DIRECT AND INDIRECT INVESTMENTS
An investment can be direct or indirect. When you make a direct investment, you acquire a claim on a particular investment vehicle such as a stock or bond. When you choose an indirect investment, you have a portfolio of stocks, bonds, or properties. A popular indirect investment is share of a mutual fund, which holds a portfolio of securities issued by mutual fund investment companies, or share of Real Estate Investment Trusts (REITs). You can have a portfolio of securities representing diversified investment types. This variety of investments minimizes risk while bringing in a satisfactory return.

LONG-TERM AND SHORT-TERM INVESTMENTS
An investment may be short-term or long-term.

Short-term investments last for one year or less. A short-term investment might be a 3-month Treasury bill. Short-term securities involve little risk and offer liquidity. They include the liquid investments listed earlier in this chapter: savings accounts, certificates of deposit, money market certificates, mutual funds, U.S. Treasury bills, and commercial paper.

Long-term investments last more than one year. A long-term investment might be a 5-year Treasury note. Some long-term investments do not mature, such as equity securities. However, you can buy a long-term investment and consider it as a short-term one by disposing of it within one year. Long-term securities are debt or equity instruments with a maturity of more than one year. A debt instrument is a certificate or security showing that you loaned funds to a company or to a government in return for future interest and repayment of principal. Equity securities are ones you have ownership interests in.

How many of your investments are short-term? How many are long-term? Is that the combination you consider best for you?

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