Different Kinds Of Investment and Their Advantages. Part 1

Different Kinds Of Investment and Their Advantages. Part 1

There's a popular saying that the more money works for you, the less you need to work for money. If you are well grounded in financial literacy, you'll value passive income. Passive income is money from something you are not actively working on, hence the name passive income.

And one of the many ways to earn passive income is to invest in things that you necessarily don't need to be actively involved in. Like all things in life, there are risks associated with investing to earn passive income, and they are dependent on the range by which the investment rises and falls. This rise and fall also determines the volatility of the investment and is what differentiates a high-risk from a low-risk investment.

Another factor associated with investment risk is the liquidity or illiquidity of the investment. The more illiquid an investment is, the more difficult it is to convert back to cash. Whereas, the more liquid an investment is the easier it is cash to convert it back to cash.

Low-Risk Investments

Low-risk investments are investments that have very minimal potential for loss, and even if there's any loss, it is also very small. Low-risk investment changes by small amounts, therefore they are less volatile. Bear in mind that they are 'low risk' not 'no risk'

If you want to play on the safe side, then low-risk investments are your best bet. However, it is not advisable to put your whole income into any form of investment without having some money set aside for day-to-day needs, nor is it okay to invest without having an emergency fund. These emergency funds should be enough to cater to your 3-6 months need in case of any unforeseen circumstances.

  1. Bonds: there are two types of bonds, corporate bonds and government bonds. For low-risk investments, it is best to focus on government bonds. Government bonds are like money you put in a fixed deposit account, but this time you are lending it to the government. They can be traded like stocks and shares, therefore your dividends will fluctuate, however, it is less Volatile and will not fluctuate within a high margin. Bonds are also called fixed-interest securities because you know beforehand how much return you will get on your investment. It is also similar to a fixed deposit, in terms of having a specific period, where after your original investment is returned at maturity. Maturity time is known as coupon. Government bonds are more low risk than corporate bonds, especially if you buy from stable economies like the US or the UK government. These governments have never defaulted in repaying investors. Bear in mind that in the UK, bonds are known as gilts, while in the US, they are known as Treasuries.
  2. Savings account: just like the name connotes, this form of investment is where you put your money into a savings account in your bank. It is a shallow risk and although it doesn't promise a lot of interest, you are almost sure of not losing your capital, as banks are insured in case of any incident. The downside to these kinds of investments is that the money may lose value due to inflation.
  3. Annuities: annuities are investments that are made with insurance companies. It can be one of the two ways. One is to invest money over some time and then receive returns in 15 years or till death or to invest a huge amount of money immediately and then receive the dividends in 15 years or till death.
  4. Certificate of Deposit Accounts: certificates of deposit accounts are accounts that yield dividends on your investment for a short or long duration, depending on the terms agreed upon. Any bank, whether brick and mortar or banks that manage their customers online offers certificates of deposit accounts. The logic is that for whatever duration you agree to save your money with the institution, it accrues interest and you can take back the initial capital and interest accrued upon maturity. There is however a caveat. Which is that if you withdraw the money before the time of maturity, you stand a penalty of losing some interest or even all the interest and some part of the initial capital. However, it is low-risk and a wise means of earning passive income.

In the next article, we will talk about other High-Risk investment and their advantages.

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