This topic covers the basic concepts of investments, including the types of investment vehicles, risk and return relationships, and the importance of diversification.
Introduction to Investments – Study Notes
1. What Is an Investment?
| Aspect |
Description |
| Definition |
Allocation of money (or other resources) to an asset with the expectation of generating a return over time. |
| Key Goal |
Grow wealth, preserve capital, or achieve a specific financial objective. |
| Time Horizon |
Short‑term (days‑months), medium‑term (1‑5 years), long‑term (5 + years). |
| Risk‑Return Trade‑off |
Higher expected returns generally require taking on higher risk. |
2. Types of Investment Assets
| Asset Class |
Typical Characteristics |
Common Instruments |
| Equities (Stocks) |
Ownership in a company; potential for high capital gains & dividends; high volatility. |
Common shares, preferred shares, ADRs, ETFs. |
| Fixed‑Income (Bonds) |
Debt securities; regular interest payments; lower volatility than equities. |
Government bonds, corporate bonds, municipal bonds, bond funds. |
| Cash & Cash Equivalents |
Highly liquid, minimal price fluctuation; low return. |
Money‑market funds, Treasury bills, certificates of deposit (CDs). |
| Real Assets |
Tangible property that can generate income or appreciate. |
Real estate, commodities (gold, oil), infrastructure. |
| Alternative Investments |
Often less correlated with traditional markets; may involve higher complexity. |
Hedge funds, private equity, venture capital, collectibles. |
| Hybrid Products |
Combine features of two or more asset classes. |
Convertible bonds, asset‑backed securities, balanced mutual funds. |
3. Core Investment Concepts
| Concept |
Explanation |
| Return |
Gain or loss on an investment, expressed as a percentage of the original amount. Includes capital appreciation and income (dividends, interest). |
| Risk |
Probability that actual returns will differ from expected returns. Measured by volatility, standard deviation, beta, etc. |
| Diversification |
Spreading capital across different assets to reduce unsystematic risk. “Don’t put all your eggs in one basket.” |
| Asset Allocation |
Strategic distribution of portfolio among major asset classes (e.g., 60 % equities, 30 % bonds, 10 % cash). Determines overall risk profile. |
| Time Value of Money (TVM) |
Money today is worth more than the same amount in the future because it can earn interest. Core to valuation and planning. |
| Compounding |
Earnings on an investment generate their own earnings. The longer the horizon, the more powerful the effect. |
| Liquidity |
Ease with which an asset can be converted to cash without significantly affecting its price. |
| Tax Efficiency |
Structuring investments to minimize tax liability (e.g., using tax‑advantaged accounts, selecting tax‑efficient funds). |
4. Investment Vehicles
| Vehicle |
Structure |
Typical Investor |
Advantages |
Disadvantages |
| Mutual Funds |
Pooled money managed by a professional; shares bought/sold at NAV. |
Retail investors, retirement plans. |
Professional management, diversification, automatic reinvestment. |
Management fees, possible load charges, less control. |
| Exchange‑Traded Funds (ETFs) |
Basket of securities traded on exchanges like a stock. |
Retail & institutional investors. |
Low expense ratios, intraday trading, tax efficiency. |
Brokerage commissions (though often low), bid‑ask spreads. |
| Individual Stocks/Bonds |
Direct ownership of |
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