What is an Investment Vehicle
An investment vehicle is a product used by investors with the intention of gaining positive returns. Investment vehicles can be low risk, such as certificates of deposit (CD) or bonds, or carry a greater degree of risk such as with stocks, options and futures. Other types of investment vehicles include annuities; collectibles, such as art or coins; mutual funds; and exchange-traded funds (ETFs).
BREAKING DOWN Investment Vehicle
Investment vehicle refers to any method by which individuals or businesses can invest and, ideally, grow their money. There is a wide variety of investment vehicles, and many investors choose to hold at least several types in their portfolios. This can allow for diversification while minimizing risk.
Types of Investment Vehicles
The different types of investment vehicles are subject to regulation in the jurisdiction in which they are provided. Each type has its own risks and rewards. Deciding which vehicles fit particular portfolios depends on the investor's knowledge of the market, skills in financial investing, financial goals and current financial standing.
Investors who delve into ownership investments own particular assets they expect to grow in value. Ownership investments include stocks, real estate, precious objects and businesses.
Stocks, also called equity or shares, give investors a stake in a company and its profits and gains.
Real estate owned by investors can be rented or sold to provide higher net profits for the owner.
Precious objects such as collectibles, art and precious metals are considered ownership investments if they are sold for a profit.
Capital used to build businesses that provide products and services for profit is another type of ownership investment.
With lending investments, people allow their money to be used by another person or entity with the expectation it will be repaid with profits. This type of investment is generally low risk and provides low rewards. Examples of lending investments include bonds, certificates of deposit and Treasury Inflation-Protected Securities (TIPS).
Investors investing in bonds allow their money to be used by corporations or the government with the expectation it will be paid back with profit after a set period of time with a fixed interest rate.
Certificates of deposit (CDs) are offered by banks. A CD is a promissory note provided by banks that locks the investor's money in a savings account for a set period of time for a higher interest rate.
Treasury Inflation-Protected Securities (TIPS) are bonds provided by the U.S. Treasury crafted to protect investors against inflation. Investors who put their money in TIPS get their principal and interest back when their investment matures over time. Both principal and interest are indexed for inflation.
Cash equivalents are financial investments that are generally as good as cash. These are savings accounts or money market funds. The investments are liquid but have very low returns.
Pooled Investment Vehicles
When multiple investors bring their money together to gain certain advantages they would not have as individual investors, it is known as a pooled investment vehicle. These can include mutual funds, pension funds, private funds, unit investment trusts (UITs) and hedge funds.
In a mutual fund, a professional fund manager chooses the type of stocks, bonds and other assets the fund will invest in on half of clients, who are charged a fee.
A pension plan is a retirement account established by an employer into which an employee pays part of his income.
Private funds generally encompass pooled investment vehicles such as hedge funds and private equity funds and are not considered investment companies by the Securities and Exchange Commission (SEC).
Unit investment trusts provide a fixed portfolio with a specified time period of investment that it sells as units to investors.
Hedge funds group together client money to make often risky investments utilizing a long and short strategy, leverage and exotic securities in the aim of achieving higher than usual returns, known as alpha.