Recently it has become very fashionable to talk about investing. Moreover, this is often done by people who actually have a very vague understanding of the concept and essence of investment activity. The types of investments for many of them remain a closely guarded secret.
At the same time, every competent and successful investor should be able to freely navigate the modern variety of financial investments. Such knowledge allows you to freely navigate existing investment opportunities and help you make the right decisions. Currently, investments can be classified according to several criteria.
Existing classifications
If you talk to several different investors and each of them is asked the question: “What are the types or forms of investments?”, the variety of answers may confuse you. Indeed, they can tell you about direct, portfolio, gross, long-term and primary investments of funds. Moreover, this list can be continued for a long time.
All these types of investments exist. The only question is on the basis of what criteria they are classified in each individual case. It is also necessary to take into account that there is no right and wrong division. All of the following gradations have the right to exist.
Investment classification may be based on the following characteristics:
- object;
- investment goals;
- forms of ownership of investment resources;
- profitability factor;
- origin of the capital used;
- degree of risk;
- liquidity level;
- by urgency;
- accounting forms.
Let's look at the listed types of investment in more detail.
Investment demand and factors of investment demand
Investment demand is the need of enterprises to obtain additional funds for their development from potential investors.
The main factors of this demand are:
- expected level of investment profitability;
- the bank rate.
Obviously, the higher the expected return on investment, the greater the volume of funds raised from investors can be expected. The bank rate influences the determination of the cost of borrowed resources.
The investor’s decision about the rationality of investing his own funds is also influenced by the following points:
- inflation rates;
- the tax burden;
- level of own income.
Division by object
From the name of this classification it becomes obvious that in this case the investment object is taken as the starting point. In other words, this is the very asset that the investor acquires in exchange for the money invested.
The main types of investments, depending on the investment object, are:
- real - acquisition of fixed assets of production, land, real estate, equipment, trademarks, brands, advanced training of employees;
- financial – purchase of securities (shares, bonds and others), lending to individuals or legal entities, leasing;
- speculative - short-term investment of capital and funds in government currencies, gold with the aim of ultra-quick profit.
In addition, types of financial investments, depending on the object, can be classified in a different way. This is an investment:
- into physical assets - into the direct development of the company through the purchase of means of production;
- in intangible assets - objects of exclusive intellectual property (patents, licenses, logos, etc.);
- in innovative scientific research and study of new technologies.
At the end of this section, it is also necessary to touch upon such concepts as net investment and gross investment. The first is characterized by the investment of financial assets in the purchase of a company or enterprise. Second, it represents the totality of net investment and the reinvestment process. In other words, the investor initially purchases the company. As a result of its operation, he makes a profit, which he reinvests in its further development.
Types and classification of investments depending on the use of capital
In this classification, three main types of investments can be distinguished:
- primary investment . They involve an initial investment of capital. For example, when starting a business, investing in the purchase of equipment and raw materials.
- reinvestment. This is the reuse of capital. For example, they invested in opening a business, received income, which they invested in further scaling the business.
- disinvestment . This is the return on invested capital, for example, if the business shrinks, the number of customers decreases. In this case, it is better to withdraw investments in order to invest them in another business project.
As you can see, there are many classifications and types of investments. Each type of investment has its own characteristics that you need to know in order to increase the efficiency of investments.
However, to assess the effectiveness of investments, it is necessary to understand what investment activity is, who is the subject and object of this activity, and what stages investment activity includes.
Division by investment purpose
Depending on the goals pursued, there are types of investments:
- direct – investing capital in a real existing business. It can be expressed in the purchase of raw materials, consumables, machines, premises and buildings. Direct investments are always aimed at the development of the company.
- portfolio - directly related to playing on the currency exchange. In this case, funds are invested in the purchase of securities. This process is also known as building an investment portfolio.
- non-financial – investments aimed at purchasing copyright or intellectual property. This group includes the acquisition of a recognizable brand, as well as patents for any type of invention.
- intellectual – associated with the investment of financial resources in research activities and the development of innovations.
How to get the maximum
- At the earliest stages, if you have already exhausted such fundraising opportunities as crowdfunding and help from loved ones (Friends & Family), contact business angels, accelerators and early-stage venture funds.
- For Series A, your options include super angels and venture capital funds.
- Starting with Series B, you can approach family offices and late-stage venture capital funds, and with the Series C+ round, you can also approach private equity funds.
In any case, remember to pay attention to the investment strategy of a particular investor and take into account his preferences regarding industry and geography.
By following these simple guidelines, you can close your round much faster and get back to focusing on product development and growing your company.
Cover photo: Gonzalo Aragon / Shutterstock
Division by resource ownership form
In this case, ownership of the invested resources is of paramount importance. In other words, we start from who actually owns the invested funds or from the sources of financing. Based on this principle, the following forms of investment can be distinguished:
- private – investments of individuals and legal entities;
- state - investment of funds from the budget of a particular country, which is carried out by specific participants in economic activity (for example, the Central Bank or the Federal Ministry);
- foreign - deposits of capital owners who are citizens or subjects of another state;
- mixed – simultaneous investments of several of the above-mentioned entities.
These forms of investment are best understood through a concrete example. Let’s say the Government of the Moscow Region put up a certain number of land plots in the Stupinsky and Ozersky districts for open auction. Thus, any interested owner of capital can invest money in their acquisition. If the winner of the auction is an individual or legal entity, then such investments will be considered private. If an American or Chinese company wins, such investments will be recognized as foreign. And so on.
Risks of real investments
A competent comprehensive assessment, an objective calculation of the payback period for real investments, and the selection of optimal companies for cooperation are three important stages for further financial success and maximum investment efficiency. As a rule, real investments belong to the class of long-term projects, and how to increase your capital in this segment and not live on a pension can be found in detail in the material on the blog.
It seems difficult to decide to invest in the development of some kind of technical base. But with a competent approach to financial analysis, as well as taking into account the realities of today's world, the technological breakthrough of Elon Musk, and even the fact that the ideological mastermind himself, an engineer by training and once a boy who was bullied at school, was not afraid to become an investor in Tesla , the chances of success of your choice are developing exponentially.
Author Ganesa K.
A professional investor with 5 years of experience working with various financial instruments, runs his own blog and advises investors. Own effective methods and information support for investments.
Division by origin of capital
Depending on the origin of the funds used, the types of investments are:
- primary – initial investments that were formed from own or borrowed funds;
- repeated or reinvestment - this money is formed directly from the profits received from the primary investment process;
- disinvestment – or investment on the contrary. They represent the withdrawal of capital from an investment project. In turn, they can be partial or complete.
Let's take a closer look at disinvestment. The question arises: “In what case can an investor take such a decisive step?” As a rule, we can talk about two situations. Firstly, the investor withdraws money from an unsuccessful investment project when he is finally convinced of its futility.
Secondly, disinvestment can be carried out with the aim of investing money in more interesting investment objects. They are necessary when the investor does not have enough other available funds for this.
Concept
If we carefully read the definition given above, we can easily identify the elements that form the concept in question.
Firstly, objects of investment activity are always assets. We can safely put an identity sign between them. Assets are real property or property rights that can bring money to their owner.
For a correct understanding, investment objects must be distinguished among the huge number of things and goods that surround us. For example, a reproduction of a painting is an interior item. That is, it acts as an ordinary product or thing and is not an object of investment. At the same time, a painting by a famous artist is an asset, since after several decades you will most likely be able to sell it for more than you bought it for.
Simply put, the object of investment activity will be any thing that can bring money over time and make its owner richer.
Secondly, the object we are considering must have a monetary value. That is, any asset has a specific established market price or value at which anyone can purchase it.
Thirdly, the investment object must have the ability to generate profit or income. A classic example would be stocks or bonds that bring dividends to their owner. However, let's complicate the task. Will the purchased apartment be an investment object?
If you purchased an apartment for the purpose of renting it out, then it immediately becomes your asset. Of course, provided that the rent is greater than utility bills.
Fourthly, the investment object is characterized by the investments that the investor spends on its acquisition. This parameter is directly related to the issue of valuation of the purchased asset.
At the end of this section, it is necessary to emphasize that there is no need to confuse the concepts of object and subject of investment activity. Unfortunately, this is a fairly common mistake. Let's remember an object - this is an asset in which money is invested. A subject is a person (company, state) investing money, or in other words an investor.
Division by degree of risk, level of liquidity, urgency, form of accounting and other characteristics
Types of investment based on risk are distinguished:
- there are practically no risks - extremely rare situations, as a rule, artificially simulated or created (for example, bank deposits in Russia - a depositor with a deposit of up to 1 million 400 thousand rubles is guaranteed to receive income thanks to the Deposit Insurance System);
- risks are lower than the average in the current market - conservative;
- average market risks – moderate;
- risks are higher than the average in the existing market - aggressive.
Investors who prefer to use an aggressive strategy often prefer investments with a higher level of risk. This is explained simply. Such investments promise maximum profit.
There are types of investments based on liquidity level:
- highly liquid;
- medium-liquid;
- low liquidity;
- not liquid.
The higher the degree of liquidity of investments, the better. In practice, this means that the owner of highly liquid assets can easily find a buyer for it at any time at the price that is currently established in the market.
The degree of liquidity of assets is well understood using the example of currencies from different countries. If an investor invested his money in American dollars or euros, then these were highly liquid investments. They can be easily sold at any nearest exchanger with the appropriate rate. However, if an investor bought Bahraini dinars or Chilean pesos, then it will be somewhat more difficult to sell them, that is, the level of liquidity of investments in this case will be lower.
If we put the time factor at the forefront, then our investment could be:
- short-term – up to 1 year;
- medium-term – from 1 year to 3 years;
- long-term – over 3 years.
According to the accounting form, investments can be:
- gross;
- clean.
In reality, these two terms are closely related. Gross investment is usually understood as the sum of all investments made during the reporting period. To calculate the value of net investments, we should subtract the monetary value of depreciation from the gross funds invested.
When we want to divide investments according to geographical or territorial principles, then first of all we should specify the region or state from which we will start. Depending on the territorial affiliation, investments are:
- internal;
- external.
If we take the Russian Federation as a starting point, then all investments made in the country itself will be internal, and outside its borders external.
An investor does not always manage his own funds. Currently, there is a widespread situation in which capital is given to a third party for management. For example, on a stock exchange this could be a managing trader.
In this regard, investments can be:
- active – the investor himself chooses investment objects;
- passive - funds are given to a third party for management.
Types and tactics
- Conservative investor
Such investors usually prefer the safety of their investments. Those. they would rather receive a relatively small profit, but with the confidence that they will receive it at all. The basic strategy for such investors is to purchase the most reliable assets for a long period of time. If we talk about reliable assets, then these are, first of all, shares and bonds of stable companies (Gazprom, Sberbank, VTB, etc.).
As for the investment period, the standard is from 2 years to 20 years. It is the long-term perspective that provides investors with high stability. After all, the longer the investment period, the lower the risk. One of the most famous conservative investors is Warren Buffett. Buffett always invests for a very long term, since he is convinced that in a couple of years it is impossible to extract the maximum benefit from owning securities. The average term that Warren Buffett manages his assets is 10 years.
- Moderately aggressive investor
There is something in between conservatives and aggressors. Those. This type of investor, just like conservative ones, prefer to preserve their investments as much as possible, but at the same time try to ensure their investments with the greatest return.
The investment period is approximately from 6 months to 2 years. With this approach, moderately large profits and no less moderate risks are expected.
- Aggressive investor
This includes people with nerves of iron. Such investors pay the least attention to the reliability of investments. They are much more interested in expected returns. And, of course, speculators fit this description.
Popular types of investments
Every year, investment activity attracts the attention of ordinary people who are not closely related to economics and finance. If you compare the profitability and riskiness of various types of investment, you can determine the most promising and profitable areas of funds. Moreover, most people want to receive passive income, which does not require active actions or special financial knowledge.
Currently, the most popular types of investments with passive income are:
- Mutual Funds – mutual investment funds;
- bank deposits;
- trust management;
- non-state pension funds;
- real estate;
- stock market game;
- hoarding investment;
- venture investment.
Let's take a closer look at each of the listed possibilities.
Mutual funds
The mutual fund offers all its potential clients to buy a unit or share in the formed investment portfolio, which includes securities of various companies. This is a classic form of passive investment. At the end of the reporting period (usually a calendar year), the shareholder receives a portion of the profit proportionally equal to the size of the share purchased by him.
The selection of securities for the mutual fund's investment portfolio is carried out by a special manager. The shareholder himself has nothing to do with this process.
Typically, mutual funds form several different investment portfolios, each of which has its own potential return and level of risk.
Bank deposits
The traditional and most popular type of investment among Russians. You don’t need to be a rocket scientist to immediately identify the main advantages and disadvantages of this method of investing money. Its main advantage is the guaranteed receipt of income specified in advance in the contract. The disadvantage of bank deposits is the extremely low level of profitability.
Trust management
In many ways, this method of investing is reminiscent of buying a share in a mutual fund. The main difference is the personalized approach that characterizes trust management. In other words, the investor does not invest money in an already formed investment portfolio, but gives it to his trustee for management. The key figure in this situation is the manager. This must be a legal entity or a specific person, whose professionalism and cleanliness the investor has no doubt about.
Non-state pension funds
These financial structures offer investors services for managing funds, from which their future pension will be formed in the future. The essence of this method of investment is not so much to preserve, but to increase the client’s financial assets.
Real estate
Investments in real estate make sense to be seriously considered during periods of sustainable economic development of the country. This is due to the fact that during periods of economic crises, real estate properties seriously lose value and liquidity. These attachments are primarily divided by object. It makes sense to talk about residential and commercial real estate.
Stock game
This type of financial investment is much more complex than participating in mutual funds or transferring money to trust management. In such a situation, the investor can rely solely on his own knowledge and experience of stock trading. Consequently, the risks of this type of investment increase significantly. Thus, stock trading is the destiny of confident, experienced investors.
Hoarding investment
Behind this long and difficult to pronounce word lies investment activity, which is directly related to investing money in art (paintings, engravings, etc.), precious metals, stones, jewelry and antiques.
Such investments also require specific knowledge and understanding of pricing factors. In addition, investments of this type are long-term and most often require a significant amount of money.
Venture investing
Such investments have become especially popular in recent years. They are characterized by investing financial assets in start-ups, innovative business ideas and projects.
This area of investment is characterized by very high risks. According to statistics, only 10–15% of all launched startups become successful companies. At the same time, if your choice turns out to be correct, then you may find yourself at the origins of a project that can change the world within a few years.
All of the above types of investments, with the right approach, can bring a lot of money. Choose wisely.
Where to begin
Decide on your funding round
Of course, there are so-called stage-agnostic investors who invest regardless of the startup’s stage of development. But in the vast majority of cases, they specialize in projects at certain stages and invest only in certain rounds of financing.
In addition, when choosing an investor, you need to take into account the volume of investments attracted and how you plan to use them.
Filter investors who invest in startups in your industry
Check to see if the fund invests in your industry. It makes no sense, for example, to present an EdTech project to a venture fund that invests exclusively in biotechnology. You will not receive funds and will waste time, even if the investor is delighted with your company.
Investors can either strictly specialize in one or more specific areas, or take a flexible approach to choosing industries to invest in.
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Quite often this depends on the type of investor - for example, venture funds tend to specialize, while private equity funds can be more diversified.
Select investors who are investing in your region
Many investors make investment decisions regardless of the location of the startups, but quite often they have geographical restrictions and do not invest in companies outside of a certain region.
From a geographic point of view, an investor can focus on a specific city or agglomeration (for example, the San Francisco Bay Area), one country, several countries, or a macro-region - North America, Southeast Asia, the Middle East, North Africa, etc.
Moreover, some funds or business angels will not consider your project if you are more than fifty miles from their office.
Therefore, carefully study the information on the investor’s website and make sure that you will not be rejected for this reason.
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