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Investments
An investment is the sacrifice of current consumption for future benefits. The investor divides his budget into the consumed part and the part intended for investments. Increasing the investment fraction is also reducing the consumption fraction and vice versa. The effect of the investment is uncertain, which means that almost every investment is subject to risk. Only very few types of investments can be considered risk-free. The investment effect always appears in the future, either closer or further, depending on the investment horizon.
For these reasons, it is sometimes so difficult for us to change the proportions of our portfolio and start investing.
For what purpose are we investing?
We want to collect funds for a consumer purchase - then the target final value of the investment is determined, usually equal to the estimated price of the consumer purchase object;
We want to increase the amount of capital - the goal is to obtain the highest possible investment value at the end of the investment period;
We want to earn regular income - the goal of the investment is to earn regular, approximately constant income;
For safety, the goal is to avoid possible partial loss of capital.
What are the types of investments?
· Tangible investments - the object of the investment is tangible, e.g. gold, works of art, real estate. Objects of tangible investments also have a use value and can be used to satisfy consumer needs. The investor expects the value of the investment object to increase during the investment period.
Financial investments - the subject of the investment is intangible, the subject of the financial investment is the so-called financial instrument. The benefits come from both the appreciation of the investment and the periodic income that the financial instrument may provide during the investment period. Unlike physical investments, in financial investments, the object of investment, that is, the financial instrument, does not represent a use value in itself, but only a monetary value. This means that in financial investments, the object of investing does not serve to satisfy consumer needs.
By definition, a financial instrument is a contract between two parties, which contract defines the financial relationship in which both parties remain.
There are three main types of financial instruments:
1. Debt instruments (debt instruments) in which one party to the contract lends capital to the other party and the other party undertakes to repay the debt and pay interest. Typical examples of debt instruments are bank deposits, bank loans, bonds.
2. Equity instruments (ownership) in which one party to the contract sells the ownership of the enterprise to the other party. A typical example of an equity instrument is a share issued by a joint stock company.
3. Derivatives (forward) where two parties define a transaction that may or must take place in the future between these parties. Derivatives are the newest group of financial instruments; These instruments, apart from the investment objective, also fulfill the investment risk management objective. The main derivative instruments are options and futures contracts.
Currently, there are more and more so-called hybrid financial instruments. They combine the features of the two groups of instruments mentioned above, e.g. a hybrid instrument may be a combination of a debt instrument and a derivative instrument. Such instruments are, for example, bonds with attached rights or the so-called structured deposit products.
The most important financial instruments that you can invest in are:
Debt instruments:
- bank deposits in national currency,
- bank deposits in foreign currency,
- treasury bills and other money market instruments,
- bonds,
Equity instruments:
- actions,
- investment certificates,
- participation units in investment funds,
Derivatives:
- futures contracts
Hybrid instruments:
- structured deposit products
