What is an Investment?

An investment is a payment made to acquire the securities of other entities, with the objective of earning a return. The key difference between an investment and other assets is that investments are intended to generate a return, while other assets are intended to be consumed over time.

There are two ways to earn a return on an investment, which are from ongoing payments issued by the investment or through the appreciation in value of the asset. Higher-risk investments tend to earn a higher return for the investor, though these investments may also result in the loss of some portion or all of the invested amount.

The investment concept can also mean the acquisition of fixed assets for internal use, also with the objective of earning a return. This type of investment is much more likely to generate returns through positive cash flows, rather than through appreciation, since the assets will eventually wear out.

Examples of Investments

Here are several examples of investments, each with a brief description:

Stocks. Stocks represent ownership in a company, giving investors a share of its profits and losses. Investors earn returns through capital appreciation (rising stock prices) and dividends paid by the company.
Bonds. Bonds are fixed-income securities where an investor lends money to a government, corporation, or municipality in exchange for periodic interest payments and repayment of principal at maturity. They are considered lower-risk investments compared to stocks, especially government-issued bonds.
Mutual funds. Mutual funds pool money from multiple investors to buy a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers, making them ideal for investors seeking diversification without managing individual assets.
Exchange-traded funds (ETFs). ETFs are investment funds that trade on stock exchanges like individual stocks but hold a diversified portfolio of assets. They offer flexibility, lower fees than mutual funds, and can track specific indexes, sectors, or commodities.
Real estate. Real estate investments involve purchasing physical properties such as residential homes, commercial buildings, or rental units. Investors earn returns through rental income, property appreciation, or real estate investment trusts (REITs).
Commodities. Commodities are physical assets like gold, silver, oil, and agricultural products that investors trade to hedge against inflation and market volatility. Prices fluctuate based on supply, demand, and global economic conditions.
Cryptocurrency. Cryptocurrencies like Bitcoin and Ethereum are digital assets that use blockchain technology for decentralized transactions. Investors buy and hold crypto as a speculative investment, though prices are highly volatile.
Certificates of deposit (CDs). CDs are fixed-term deposits offered by banks that pay a guaranteed interest rate over a specified period. They are low-risk investments, ideal for conservative investors looking for stable returns.
Private equity. Private equity involves investing in privately held companies, often through venture capital or buyout funds. Investors aim to generate high returns by improving company performance and selling their stake at a higher value.
Annuities. Annuities are financial products offered by insurance companies that provide regular income payments in exchange for an upfront investment. They are commonly used for retirement planning to ensure a steady income stream.