ABM Business Finance Lesson10--Introduction to Investment and Risk-Return Trade-off| Lainne's Lesson

Investment in finance is defined as a monetary asset purchased with the expectation of generating future income or being sold for a higher price. It's crucial to research and plan before investing, as every investment has pros, cons, and varying levels of risk and return.

Bank deposits include savings accounts (most common, least risky, minimal interest), checking accounts (transactional, low or no interest, often used by businesses for salary disbursements), and time deposits (higher interest than savings but cannot be withdrawn within a fixed term).

Investment securities are tradable financial instruments. Bonds involve lending money to an entity for a fixed interest rate, and can be corporate or government issued. Equity, such as stocks and pooled funds (mutual funds, REITs, UITFs, money market funds), gives investors a stake in a company's profits and can offer higher returns than bank deposits.

Other investment types include real estate (safest, appreciates over time, can be passed on, but takes time to realize profits), businesses (owner invests capital to sell products/services for profit), insurances (legally binding contract for financial protection against uncertainties), collector items (can be sold for a higher price), and commodities (like gold and silver, whose values grow over time).

Personal investments are also important and include investing in talents and skills, good relationships, personal brand and reputation, health, people, and education. These investments contribute to personal growth, well-being, and future opportunities.

Investments are grouped into fixed income and equities, alternatives, and other assets. Stocks offer high potential returns and grow with the economy, but come with greater risk and require research. Bank deposits are less risky and easily accessible, but offer lower returns. Bonds provide fixed, high potential returns and are more stable than stocks, but are less liquid and can involve losses if not held to maturity.

Mutual funds offer professional portfolio management and dividend reinvestment but have high expenses. UITFs are easy to open and have low management fees but give investors no voting rights. Currencies are highly liquid but fluctuate frequently. Commodities reduce risk against inflation but involve storage and transportation costs. Real estate appreciates and can be a source of income but requires large capital and is illiquid. Insurance provides financial protection but adds responsibility and cost.

Investment generates income but is always prone to risk. Risk is the probability that actual returns will differ from expected returns, while return is the profit. The risk-return trade-off principle states that potential returns increase with higher risk. Low uncertainty associates with low potential returns, and high uncertainty with high potential returns. This means higher profits often require accepting a higher possibility of losses. An example using stocks (higher return, higher risk) versus bank time deposits (lower return, lower risk) illustrates this concept.