“A comprehensive guide for investors”
Investment is an economic activity that consists of allocating resources to obtain a benefit in the future. Investment mechanisms are the instruments that allow this activity to take place.
There is a wide variety of investment mechanisms available on the market, each with its characteristics and risks. The choice of the right investment mechanism will depend on the investor’s objectives, risk profile, and time horizon.
Types of investment mechanisms
Investment mechanisms can be classified according to different criteria. A common classification is as follows:
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Based on the underlying asset:
- Fixed income investment mechanisms: Fixed income is an asset that generates a regular stream of income, such as bonds or notes.
- Equity investment mechanisms: Equity is an asset whose value can fluctuate, such as stocks or mutual funds.
- Real estate investment mechanisms: Real estate is physical assets, such as houses, apartments, or commercial premises.
- Other asset investment mechanisms: Other assets that can be invested in are derivatives, precious metals, or works of art.
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According to the degree of risk:
- Conservative investment mechanisms: Conservative investment mechanisms are those that offer a lower risk, such as time deposits or fixed-income mutual funds.
- Moderate investment mechanisms: Moderate investment mechanisms offer a balance between risk and return, such as mixed-income mutual funds.
- Aggressive investment mechanisms: Aggressive investment mechanisms offer a higher risk, but also a higher potential return, such as equity mutual funds.
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According to the time horizon:
- Short-term investment mechanisms: Short-term investment mechanisms are those that are used to obtain a profit in a relatively short period, such as time deposits or short-term equity investments.
- Medium-term investment mechanisms: Medium-term investment mechanisms are those that are used to obtain a profit in a period of between one and five years, such as mixed-income mutual funds.
- Long-term investment mechanisms: Long-term investment mechanisms are those that are used to obtain a profit in more than five years, such as equity mutual funds.
Characteristics of investment mechanisms
Investment mechanisms have several characteristics that distinguish them from each other. These characteristics include:
- Returns: Returns are the gain that is obtained by the investment. The returns of an investment mechanism can be fixed or variable.
- Risk: Risk is the probability that a loss will occur due to the investment. The risk of an investment mechanism can be high, medium, or low.
- Liquidity: Liquidity is the ease with which the investment mechanism can be sold. The liquidity of an investment mechanism can be high, medium, or low.
- Costs: Costs are the expenses associated with the investment. The costs of an investment mechanism can be high, medium, or low.
Investment risks
Every investment carries a risk. The risk of investment depends on several factors, such as the type of underlying asset, the degree of risk of the investment mechanism, and the time horizon of the investment.
The main investment risks are:
- Market risk: Market risk is the probability that the value of the underlying asset of the investment will be affected by changes in the market.
- Credit risk: Credit risk is the probability that the issuer of the underlying asset of the investment will not fulfill its obligations.
- Liquidity risk: Liquidity risk is the probability that the underlying asset of the investment cannot be sold at a reasonable price.
The choice of the right investment mechanism is an important decision that should be made taking into account the investor’s objectives, risk profile, and time horizon.
Before investing, it is important to be properly informed about the different investment mechanisms available.
By Orlando J. Gutiérrez