Defining Investment

Generally, investment is defined by dictionaries as, transacting to produce income or profit.

There are only three investment groups; ownership, lending and cash equivalents.

Ownership Investment

This class of investment is the most volatile but also the most profitable.  Examples are:

  • Stocks/Shares.  From futures to currency swaps your expectation of profit depends on market valuation.
  • Business.  Entrepreneurship requires more than just ownership and capital.  Creating products, services and sales is risky, but the potential return is large.
  • Real estate.  Considering the 2008 mortgage meltdown it is dangerous to consider your primary residence an investment.
  • Precious Objects.  Gold, Platinum, Art and the like.  Like property there is the risk of depreciation with regard to damage and storage costs.

Lending Investments

A little lower risk but then lower returns.  You become the bank with associated risks.  Examples:

  • Your savings account.  You are lending your capital to the bank with pitiful returns.
  • Bonds.  A category from CDs (Certificate of Deposits) to International Debt Issues.

Cash Equivalents

Any cash investment that can be converted to cash immediately.

  • Money Market Funds.  Although the return is very small it usually is better than your savings account.  It is also very liquid in that you are able to present checks against your balance like an ordinary checking account.

Almost an Investment

Here we could think of our education, a cup of coffee to wake us up for longer working hours or a lawnmower to be more time efficient.  Consumer purchases depreciating over time are not investments.

Bottom Line

There are three types of investments: ownership, lending and cash equivalents.  There is no fourth category of consumer purchases.  Admittedly, it’s a clever piece of advertising that removes some of the guilt from impulse purchasing. The decisive test is whether there is a potential to turn a profit. The operative word here is; “potential” because not every legitimate investment makes money.  Making money through investing requires research and evaluating different investments, not simply knowing what is and is not an investment.  That said, being able to see the difference between an investment and a purchase is an essential first step.


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