The concepts of fixed income and equity are two concepts that must be clear if we learn to invest correctly our money.
When speaking of fixed income and equities, generally referred to income generated by financial assets or securities (stocks, bonds, bills, etc.) is made; however, these terms actually apply to the income generated by any type of investment (including savings schemes).
Fixed income investments are given where it is known in advance (or at least an acceptable prediction) which flows that generate income (which do not necessarily have to be constant or regular) will be.
An example of fixed income investments is financial assets or securities such as bonds, debentures, letters, and notes; real estate for rent, and savings systems such as time deposits and savings accounts.
Generally, fixed income investments generated lower returns than equity investments, but have a lower risk. These investments are generally made long term.
On the other hand, the equity is given in investments where it is not known in advance what the income flow that will generate (which may even be negative) will be because they depend on various factors such as the plunged a company, market behavior, the evolution of the economy, etc.
An example of equity investments is stocks, shares in mutual funds, and bonds and convertible bonds.
Usually, equity investments generate higher returns than fixed income investments but are at increased risk. These investments are generally made in the short or medium term.
Fixed income investments have low profitability and low risk while equity investments have high return and high risk.
The best way to reduce or manage risk is through diversification , ie, “not putting all your eggs in one basket”, but rather diversify investments.
One way to diversify investments is acquiring fixed income investments and equity investments, ie building a portfolio that combines both types of investments.
The proportion of these investments will depend on the objectives and investor profile , for example, if seeking greater profitability, greater investment must be equity; and the lower the risk tolerance, the greater should be fixed income investments.