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In order to choose the best investment for you, you need to understand the wide range of options that you have. These different products are aggregated into groups according to their financial structures. In this blog piece, we will explore the basics of the main options available to investors.
Overall, analysts and portfolios managers divide investments into five different classes with similar structures, rules, and regulations. These are what makeup investors’ portfolios: equities, bonds, cash, real estate, and derivatives.
Equities, also called Stocks, are shares of publicly- traded companies. They are traded at stock exchanges (where investors can buy and sell securities) and earnings come from stock rises or dividend payments (made by a corporation to its shareholders, usually as a distribution of profits). Equities are classified as small-cap, mid-cap or large-cap according to the company’s market capitalization (dollar market value of a company’s outstanding shares of stock).
Bonds or other fixed-income products are well-known across financial markets. They are investments in a payment promise by a company (called debt security). The payment to a debtholder is a rate of return in the form of interest.
Cash equivalents include legal tender, bills, coins, checks received but not deposited, and checking and savings accounts. Investors can use this class to keep liquidity in the portfolio as securities have short-term maturity dates (the final payment date) of usually three months or less.
Real estate or other tangible assets are a mechanism to invest in long- term wealth, given the increase of value in these assets. Investors can earn money and profit from a passive income such as having rental property and generally be more protected from inflation (sustained increase in the general price level of goods and services in an economy).
This asset class is a financial instrument that is based on, or derived from, another asset. Derivatives are presented to investors in the form of contracts (buy or sell a stock in the future), options (buy or sell a bond at a set price on or before a certain date), or a forex market (a market for the trading of currencies), among others.
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