Types of Investments

Chapter 2 - Types of Investments

Chapter 2, Types of Investments, is about multiple investment choices available to retail investors in the capital market. The chapter covers about eight types of investments. For futures and options (F&O) and bonds, there is an in-depth analysis using real-world examples with detailed diagrams and tabular data.

Never gauge the real taste of coffee by the amount of sugar in the coffee, or else you are clueless about better options.

— Investing in Options, Topic 2.8, Chapter 2

In a marketplace, there are multiple asset classes with varied risk-reward ratios. Depending on the investor's short-term and long-term risk profile, investors can choose any one or more asset classes for portfolio investment.

Low-risk investors (conservative investors) can choose to invest in debt securities or invest in equities through mutual funds managed by professional fund managers. High-risk investors can choose to invest in volatile asset classes like equities.

Topics covered

  • 2.1Investing in Equities
  • 2.2Investing in Bonds
    • 2.2.1Castle and Crocodiles
      • 2.2.1-1Kingdom Weakness
      • 2.2.1-2Ferryboats
      • 2.2.1-3Normal Ferryboat Tariff
      • 2.2.1-4Inverted Ferryboat Tariff
    • 2.2.2Bond Dynamics
      • 2.2.2-1Bond Price
      • 2.2.2-2Bond Yield
      • 2.2.2-3Yield Curve
    • 2.2.3Yield to Value Relation
    • 2.2.4Bond-Equity Relation
      • 2.2.4-1High Inflation Case
      • 2.2.4-2Low Inflation Case
  • 2.3Investing in Mutual Funds
  • 2.4Investing in Index Funds
  • 2.5Investing in ETF
  • 2.6Investing in Gold
    • 2.6.1Gold and Candy Factory
      • 2.6.1-1Gold Investor
      • 2.6.1-2Candy Investor
      • 2.6.1-3Pricing Power
  • 2.7Investing in Futures
    • 2.7.1Orange Harvest
      • 2.7.1-1Natural Calamities
      • 2.7.1-2Yield Risk
      • 2.7.1-3Price Fluctuations
      • 2.7.1-4Harvest Forecast
    • 2.7.2Orange Futures
      • 2.7.2-1Farmer gain is Vendor loss
      • 2.7.2-2Vendor gain is Farmer loss
      • 2.7.2-3Farmer and Vendor break even
  • 2.8Investing in Options
    • 2.8.1Options Contract
      • 2.8.1-1Call Options Contract
      • 2.8.1-2Put Options Contract
    • 2.8.2Orange Options
      • 2.8.2-1Good Orange Harvest
      • 2.8.2-2Zero Orange Harvest
    • 2.8.3Options Dynamics
      • 2.8.3-1Puts are less than Calls
      • 2.8.3-2Puts are more than Calls
    • 2.8.4Put-call Ratio
      • 2.8.4-1Put-call Investment Region
      • 2.8.4-2Zonal Trade Actions
      • 2.8.4-3Bearish and Bullish Signals

Summary

The chapter Types of Investments covers the different types of asset classes available for short-term and long-term investments. Provides comparison listings between investing in direct equity, mutual funds (equity and debt), index funds, and ETF. Reasons why should investors need to choose broad-based index funds or broad-based ETF for very long-term investing?

Bonds (debt securities) are explained in detail under the topic Investing in Bonds. How the short-term and long-term bond yields relate to the growing and the declining economy is demonstrated under the sub-topic Castle and Crocodiles. In the sub-topic, Bond Dynamics, investors will learn about how the bond price, yield, and yield curve are related to each other and how bond yields affect the short-term and long-term equity returns.

Investing in Gold topic explains with the Gold and Candy Factory example why investors need to invest in candy factory rather than in gold. How investing in a company with pricing power is better off than investing in gold when it comes to hedging against inflation.

The topics Investing in Futures and Investing in Options walkthrough futures and options in depth by taking orange farmer and orange vendor as an example. Investors will learn how an orange farmer and vendor utilize orange futures and options contracts to mitigate various risks like natural calamities, yield (harvest) risk, and price fluctuations. The Options Dynamics sub-topic explains how to read a market bearish and bullish signals. Investors will find concise definitions of short selling, short-covering, long buying, long unwinding and learn why speculators write put-call options contracts?