Now that you know some basics about investing and ways to find money to invest, it’s time to learn about the types of investments that are available. There are two basic categories of investments: ownership and loanership. Equity or ownership investing means becoming a partial owner of a company or piece of property through the purchase of investments such as stock, growth mutual funds, and real estate. With ownership investments, you have influence on some decisions made about the investment. For example, if you own stock, you may vote for members of the board of directors that makes decisions about the company or make proposals concerning its operations. If you own an apartment which you rent, you make decisions such as repainting and setting the rent price. When the value of an investment goes up, you share that increase with other owners; when it goes down, you share the loss.
When there are earnings, you share them. There are no guarantees about what the price of the investment will be should you want to sell it in the future. The price may be higher than it was when you bought the investment but it could be lower. Likewise, there are no guarantees that there will be earnings (such as dividends) or of how much they will be. Price and earnings may be affected by the management of a company or by outside factors such as political changes, weather, and the national or world economy.
On the other hand, when you have a loanership investment, you simply loan your money to someone (e.g. a bank or state government) and get an agreed upon return. Generally, when you invest larger sums of money and invest for longer periods of time, you earn more. If you want to learn more about these investments please refer Unit 5, Fixed-Income Investing, in this home study series.
The focus of this unit is ownership investments. These investments, equities, can either be owned outright or purchased on credit. Examples of equities include stock, growth mutual fund shares, real estate, collectibles, commodities, and businesses. This unit will provide you with an overview of investment products available for purchase. If you are interested in investing in any of these products, you should learn more about their characteristics, as well as about the particular company or product, before investing.
Most ownership investments are found fairly high in the Pyramid of Investment Risk pyramid (Figure 1). In other words, with the increasing potential for a high rate of return comes a high potential for loss of principal. The specific investments you make can influence how high that risk is. For example, owning a speculative stock has more risk than owning a home in an established neighborhood.
Figure 1. Pyramid of Investment Risk Source: National Institute for Consumer Education, 1998