Just like the evolution of society, investments and the financial sector at large, have undergone changes and development over many years. The history of modern day investing – the dedication of funds to achieve returns – dates back to the 16th century with the establishment of the Amsterdam Stock Exchange in 1602. What started as a privilege of only elite classes is now easily assessable to virtually anyone with a mobile device, thanks to the rise of technology.
The rise of retirement funds (pensions), the evolution of investment analysis and strategies; financial crises and regulatory reforms; and the emergence of new investment structures, are among very interesting parts of history. However, this write up centers on the categorization of investments.
Generally, there are two broad categories in investments and these are:
- Traditional investments.
- Alternative investments.
In Finance, the concept of traditional investment refers to the dedication of resources into well-known assets. To put simply, traditional assets are those the typical investor would think about upon hearing the word “investment”. These classes include the basic categories of stocks, bonds, and cash.
Stock (Equity): This represents ownership in a company. Investing a company’s stock means taking part ownership of such company with the view of gaining dividend returns and/or capital appreciation. Stocks can be further broken down into two main categories namely: Preferred stock and Common stock.
Fixed Income: Unlike equity investing, fixed income investment entails an investor lending his funds to a borrower (company, government etc.) with the view of earning a fixed interest return over the life of the fixed income instrument. Various fixed income instruments include government bonds, commercial papers, treasury bills etc.
Cash (Cash Equivalents): These are highly liquid set of assets. They include actual cash, as well as equivalents, which are easily converted to cash, such as banker’s acceptance, fixed deposit accounts. Marketable securities and money market holdings such as treasury bills, and short-term government bonds with a maturity date of three months or less are also consider cash equivalents.
Alternative assets are less traditional and generally more risky investment options hence, they do not fall into one of the conventional investment categories. They include, but are not limited to, the following:
Real Estate: This is the investment in land and properties with a view to gaining rental income and/or asset appreciation. They include direct investment in commercial and residential properties and indirect investment in such properties through Real Estate Investment Trusts (REITs). REITs are companies that own and operate income producing real estate properties. REITs gives the average investor (that does not have the financial capacity to invest in properties assets directly) an opportunity to earn real estate income as small funds from numerous investors are pooled together for that purpose.
Commodity: As the name suggests, these are basic goods used as an input in the production of goods and service or for final consumption. The three main categories of commodities are: 1) Agriculture, 2) Energy and 3) Metals. In today’s world of investing, investors are able to invest in commodities both directly and indirectly – with the use of derivative instruments. However, it is worthy of note that unlike equities, fixed income and real estate investments where return is earned through periodic income and/or capital appreciation, returns on commodities are solely from price appreciation of the commodity.
Private Equity: This is just like traditional equity investment, however, the difference between private equity and traditional equity investment is that the funds are invested directly in private companies rather than public or listed companies. Primarily, institutional investors, who can dedicate substantial funds for a long period, practice private equity investments.
Foreign Exchange: This entails the buying and selling of variouscurrencies with a view to profit from their appreciation and depreciation.
Other notable alternative assets: Venture Capital, Collectibles, Hedge funds, Cryptocurrencies etc.
For a budding economy like Nigeria’s and its expanding investment space, a lot of skepticism abounds over alternative investments and regulations involved therein. There is so much room for growth! However, there exists a gradual but steady awareness and participation in both traditional and alternative investments. Regardless of where you choose to make your nest, it is always imperative to seek the advice of professionals in that field while making decisions.