Investments concepts
Investments concepts like Bonds, Shares, Short-term investment may be little hard for those who are new to investment. We will try to simplify it here.
Simple Example
Let’s use an example to demonstrate the types of investments. For instance, imagine you are going to start a small store. You need some money to get your store started.
You ask your friend to lend you Rs 10,000 and write this down on a piece of paper: "I owe you Rs 10,000, and I will pay you back in a year plus 5% interest." Your friend just bought a bond by lending money to your "store" named “IndianStore”.
To get more money, you sell half of your company for Rs 5,000 to your brother Ramu. You put this transaction in writing: "IndianStore will issue 100 shares of stock. Ramu will buy 50 shares for Rs 5,000." Ramu has just bought 50% of the shares of stock from IndianStore.
You sell Rs 50,000 worth of goods. Business is going good. Your costs for setting up the store is Rs 15,000, plus you pay yourself Rs 10,000 for the hours you work. The store makes profits of Rs 25,000
After one year, from the Rs 25,000 profits, you pay back your friend Rs 10,000 plus Rs 500 interest. You pay Rs 2,000 to Ramu and yourself, shareholders (a fancy name for owner).
In business terms, the Rs 2,000 paid to the owners is called a dividend. You decide to put the dividend money in the bank. Putting money in a Bank is a short-term investment.
Through this example we have tried to cover three types of investments: short-term investments, bonds, and stocks. Besides these three, there are real estate (buying a house), commodities (gold and silver), collectibles (such as paintings), and mutual funds.
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