Traditional investing is generally accepted to mean those investments in stocks, bonds, real estate and cash with an expectation of a Return on Investment (ROI). An ROI is a measure of performance where the efficiency of a particular investment, measured as a percentage for a certain period of time (e.g., monthly, semi-annually, annually, etc.), can be compared to other investments. ROI is calculated by dividing the return by the initial cost of the investment.
ROI = [Gain (or Loss) / Initial Investment Cost] x 100%
Through a stock exchange, an individual purchases “shares” (i.e., fractional pieces) of stock in a publicly-traded company resulting in fractional ownership of that company. The numbers of shares purchased, multiplied by the price per share, determines the “initial value” or “initial investment cost.” Over time, the share price of a stock will fluctuate (i.e., rise or fall) for a given period of time. A stock investor needs the value of the share price to rise over time before he/she can sell their position for a “profit” or “gain,” else a declining share price will result in a “loss” (i.e., a position value less than the initial investment cost).
Bond investments are considered “fixed-return” investment vehicles that allow an individual to know ahead of time approximately how much money they will make over a given period of time. Bonds come in a variety of types – all using the same fundamental calculation method based on future and present value. Bond types include Corporate Bonds, Convertible Bonds, Callable/Redeemable Bonds, Term Bonds, Amortized Bonds, Adjustment Bonds, Angel Bonds, and Junk Bonds.
When investing in bonds, it’s important to determine the “present value” of a bond’s future cash flow. By doing so, an investor can know how much upfront money (i.e., initial investment) is needed to produce a future cash flow.
The “future value” of the bond is calculated first using the “coupon rate” (a percentage), the cash flow timing (i.e., the “maturity period”), the “maturity value” (a dollar amount) of the bond, and the bond’s payment schedule (i.e., monthly, semi-annually, annually, etc.). Next, the present value is calculated using the calculated future value of the bond plus one additional item – the “discount rate” (a separate percentage).
Real Estate Investments
Like stock investments, “real estate investment” is dependent on the price of the purchased property (i.e., undeveloped land, commercial real estate, residential real estate, industrial real estate, etc.) to rise over time, resulting in a profit (i.e., a gain) over the initial investment.
Cash investments have the lowest ROI of all investments, but are highly “liquid” (i.e., easily accessible and transportable) compared to other types of investment. Examples of cash investments include money-market accounts and simple savings accounts. Such accounts are considered “interest-bearing” as they have an interest rate associated with them.
An investor deposits money into them with the expectation of having a gain (and not a loss) over a certain period of time. Depending on the terms and conditions of the account, money market and simple savings accounts, like those you find at a local bank or through an individual’s retirement account, will pay a fixed amount of money into the account based on weekly, monthly, or semi-annual interest calculations. In short, cash investments are often the first investments individuals encounters and are considered the safest.
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