Become a better investor
Lesson in Course: Investing basics (beginner, 4min )
There are many different types of investments. What are they and what do we need to know about them?
Let's start by breaking investments into two big categories, physical and nonphysical assets.
Physical assets include anything that we can touch or hold and often use outside of just being investments. Common examples include commodities and collectibles.
Coffee Bean: Coffee is a soft commodity and is one of the most consumed beverages worldwide. The market for coffee is enormous; well over $400B globally! Roasters like Starbucks around the globe are sensitive to the price of coffee beans. They might buy large amounts of beans ahead of time if they think the price of beans will go up. They often sell excess beans to other roasters
Crude oil: Oil is another commonly traded commodity with commercial value. Refineries like Valero rely on buying barrels of crude oil, so their business depends upon the price of oil. They usually buy it at a fixed price on a predetermined future date to lock in their costs to produce gasoline and other petroleum products. This protects them if prices rise in the future, perhaps due to a cut in OPEC oil production or turmoil in the Middle East.
Rare earth metals: Gold has been valuable for thousands of years with many uses. Investors typically treat it as a safe alternative to cash during economic uncertainty, such as downturns or recessions.
Vintage Air Jordans: Sneakers are considered collectibles and, in some cases, lead to impressive profits. For example, Yeezy 2 Red Octobers sold for $250 in 2014 and, in 2021, are worth over $10,000!
1962 Ferrari GTO: Most cars don't increase in value; however, vintage cars are collectibles that can appreciate over time. The 1962 Ferrari GTO is the most expensive Ferrari sold for $48.4 Million in 2018.
House: Real estate is another valuable asset that has been around forever. Investors and landowners earn profits from this type of asset by:
Nonphysical assets are investments that have a more intangible value. They usually don't provide additional value beyond the ownership of the asset: like a nice cup of coffee, fuel for our car, beautiful jewelry, or a roof over our head.
Stocks: Shares or equity in a company represents an ownership stake in the company. The ownership stake means we own a percentage of the total assets and cash of the company, but it doesn't mean we get a chair in a conference room. Read more about stocks.
Bonds: Bonds are debt from companies and governments that we can buy directly or from someone else holding the bond. Owning a bond means we are entitled to the money from interest and principal payments. Check out this introduction to bonds.
Crypto: Cryptocurrency, like Bitcoin, is an alternative form of currency. Despite debates about the speculative nature of cryptocurrency and the practical applications of blockchain, cryptocurrency is considered a nonphysical alternative asset class since the tokens are digital and recorded on the blockchain.
ETFs and Mutual funds: Owning a share of an exchange-traded fund, ETF, or a Mutual fund means we own a basket of investments which could include stocks, commodities, and bonds. Mutual funds are managed by a team of professional investment professionals, whereas ETFs follow or replicate a specific index. Compare the similarities and differences between mutual funds and ETFs.
Derivatives are a unique type of nonphysical asset. Derivatives are contracts between two parties regarding an exchange of an asset - so the price of a derivative depends on the price of the underlying asset. When the asset price changes, the value of our derivative will change accordingly.
Stock options in your startup: Stock options in your startups represent the right to purchase shares of stock in your startup. The value of options will go up and down in correlation based on the company's value. Learn about stock options at startups.
Season tickets: Season tickets are contracts between the team and the buyer for seats to all of the games in a season. The price of the season tickets derives its value from the underlying asset, the seat. If the team makes it to a championship, the value of that seat goes up, making the season ticket more valuable.
It's much simpler to invest in nonphysical assets so that we don't have to deal with the transportation and storage costs of physical assets. What would we do with barrels of crude oil or large quantities of coffee beans? This doesn't mean we should ignore what happens in those markets. If we own shares of Starbucks stock, we should keep in mind that the price of coffee beans has a significant impact on their business and, therefore, the value of our shares. Even if we don't invest in oil companies, oil price changes will affect what we pay at the pump.
Investments that we can touch or hold and often have uses outside of just being investments such as commodities, real estate, equipment, and collectibles.
Investments that cannot be touched but have a more intangible value by owning it.