What Are Investments? A Guide to Investment Portfolios

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About General Information What Are Investments

What Are Investments? – Have you ever tried investing? Over the years, more and more individuals have started to engage in investment opportunities, especially now that more assets or portfolio components are slowly emerging. If you’re planning to give investments a try but don’t know how and where to begin, we’ve got you covered.

We’ve created a list of some of the most popular types of investment portfolios for you to check out. But before we get started, let’s take a quick look at what an investment is and how it works.

Investment in a nutshell

An investment is an item or asset you use to make an income or generate money. It can also mean the total amount of money you spend to buy assets for long-term financial plans. Simply put, investing is allocating an amount of money to a particular asset with the expectation that it will grow in value over time. 

When investing, there’s this thing called an investment portfolio. This is a set of financial items, called asset classes, that an investor owns or a group of investments used by an investor to make money or earn profit while preserving the capital. 

Here are some examples of the financial assets you can invest in and find in an investment portfolio:

  • Stocks – Stocks are portions or shares of a company. This means that if you buy shares of a specific company, you become its stockholder or part-owner. Often, the investor’s ownership size depends on the number or percentage of the shares owned. 

When you invest in stocks, you gain income by getting a portion of the profits made by the company through dividends to its stockholders. A dividend is a share of profits and retained earnings that a company makes and pays out to its stockholders or part-owners.

It’s also important to note that stocks can be sold at a higher price once they’re bought. However, the price will depend on the company’s performance. Stocks are the most common component of an investment portfolio. Because of the risk in the volatility of stocks, they are also known as the asset with the greatest risk and highest returns.

  • Bonds – Bonds, or fixed-income instruments, are what companies or governments use to raise money by borrowing from investors who are willing to lend them money for a certain amount of time or maturity date. 

To better understand bonds, think of them as a loan from an investor. Here, the borrower uses the money for specific operations and the investor or loaner receives interest on the investment. Simply put, the borrower intends to return the principal amount used to buy the bond with interest.

Bonds are also known to be generally less volatile than stocks but still offer decent returns. The reduced risk of holding more bonds sometimes drives other investors to increase the amount they hold. However, it’s essential to understand that some types of bonds like high-yield or junk bonds also have a higher risk.

  • Cryptocurrencies – Cryptos, also known as digital or virtual currencies, are among today’s most popular financial assets. These digital coins only run with technology, which is also why they’re called internet money. Bitcoin (BTC), for example, became widely known for traders and investors worldwide because of its highly volatile nature. Similar to stocks, there is a high risk, high reward ratio involved. Compared to other financial assets, crypto is more accessible to purchase. As many exchanges continue to emerge today, you can quickly learn how to buy Bitcoin with PayPal, gift cards, cash, and more.

Currently, there are over 12,000 cryptocurrencies available on the market, which means you have thousands of options to choose from. However, it’s important to note that not all cryptos perform the same. And since it’s relatively new to the fintech world, diving into it requires research and familiarization.

  • Other assets – Other financial assets like gold, oil, and real estate are also present in investment portfolios. Each of these assets often has specific risks, so make sure to understand what they are and how these assets work before finally jumping into an investment.

Types of an investment portfolio

Now that we’ve learned about the components let’s move on to the different types of investment portfolio. 

  • Aggressive investment portfolio

This type of investment portfolio aims for the highest possible return. Investors who go with aggressive investment portfolios often have a high tolerance for risk and lengthy investment periods. It is also said to perform better in the long term, which can be five years or longer. Simply put, this type of portfolio is for investors who aren’t afraid of high risks.

  • Balanced investment portfolio

Also known as a moderate investment portfolio, this is a slightly aggressive portfolio that’s meant for investors with a longer time horizon and an average tolerance for risk. Unlike the aggressive investment portfolio that aims for the highest possible gain, the balanced or moderate investment portfolio seeks to balance the amount of risk and return kept within the fund. Its main goal is to gain a long-term appreciation of capital. 

  • Conservative investment portfolio

If the first two types are still risky for you, check out the conservative investment portfolio. This type puts the safety of both the investor and the investment first above anything else. A conservative investment portfolio aims to maintain the portfolio’s actual value or shield it against the drastic effects of inflation. It is geared towards preserving the capital and current income. Apart from that, only a small amount of risk strategy is used. This makes it ideal for those who are retiring and those who want to focus on having more assets than income earned from interest.

How to build an investment portfolio

Let’s now look at some of the most important things you need to keep in mind when building an investment portfolio.

  • Know why you’re creating a portfolio – Earlier, we’ve discussed the different investment portfolio types and discovered that each is leading in another direction. Knowing the objective of your portfolio is crucial to get the kind of outcome you want in the long run. These goals may include saving for retirement or gaining as much capital as possible. 
  • Lessen the investment turnover – It’s essential to understand that some investments take time before they pay off. This is why buying and selling stocks within a short period may not be ideal because of increasing transaction costs.
  • Avoid spending too much on an asset – Remember, the lower the value of the asset you get, the higher your potential return is.
  • Consider having multiple investments – If possible, try multiple investment assets for a more diversified portfolio. You can try stocks, bonds, and other financial assets like crypto. In case you didn’t know, you can quickly get started with digital assets and even get a free Bitcoin wallet from peer-to-peer exchanges like Paxful. You can trade your cash to Bitcoin in nearly 400 ways quickly and securely. Having a wide range of investments can help you grab financial opportunities in many different ways and places. It also helps to lower the overall risk in your investment journey.

Are you ready?

Like building anything new, creating an investment portfolio also requires more effort and deep research. Remember, we’re talking about your hard-earned money here, so it’s better to know the ins and outs of what the engagement is all about before deciding to finally hop in. Carefully look into each financial asset we’ve discussed earlier, go over the types of investment portfolio above, and start from there.

Decide which asset or assets to invest in and which strategy to use. Will you stick to one asset or go for a mixed investment? Will you go with a more aggressive portfolio type or a safer one? There are many options to choose from. So, do your research and see which is the best option for yourself. Good luck!

*The content of this article is for informational purposes only; you should not construe any such information or other material as legal, tax, investment, financial, or other advice. You should carry out your own independent verification of facts and data and may want to seek professional advice before making any decisions.

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