What Is Investing?
More generally, investing means putting money into a project or undertaking, making money more significant than the initial investment. It means giving away resources, usually capital (money), to make a profit, gain, or income.
You can invest in many different things, either directly or indirectly. For example, you could use the money to start a business, or you could buy real estate to rent it out and then sell it for a higher price later on.
Investing is different from saving because the money is put to work, which means there is a chance that the project(s) will fail and the money will be lost. Speculation is also different from investing because the money is not put to work; instead, it is bet on short-term price changes.
How to Understand Investing
Investing is a way to make your money grow over time. The main idea behind investing is that you will get a good return in the form of income or price growth that is statistically significant. You can invest in many different things and get a return on your money.
When you buy, risk and return go hand in hand. Low risk usually means low expected returns, while high returns usually mean higher risk. Essential investments, like Certificates of Deposit (CDs), are low-risk. Bonds and other fixed-income instruments are at higher risk, and stocks and other equities are considered risky. Most people think commodities and derivatives are the riskiest trades you can make. You can also put your money into something useful, like land or real estate, or something fragile, like fine art or antiques.
Expectations for risk and return can be very different, even within the same asset class. Regarding risk and return, a blue chip that trades on the New York Stock Market will be very different from a micro-cap that trades on a small market.
The kind of return an asset gives depends on what kind of asset it is. For example, many stocks pay profits every three months, while most bonds pay interest every three months. In many places, the tax rates on different types of income are not the same.
Price growth is an integral part of return, along with regular income like a dividend or interest. So, the total return on an investment equals the sum of the interest earned and the value of the investment rising. Standard & Poor’s says that since 1926, capital gains have made up two-thirds of the total stock return for the S&P 500, while dividends have made up almost a third.1 This means that capital gains are an essential part of investing.
Regarding economics, buying and saving are like two sides of the same coin. This is because when you put money in a bank account to save it, the bank gives that money to people or businesses that need it. Because of this, your savings are often invested by someone else.
Different kinds of investments
These days, investments are mostly linked to financial tools that help people or businesses get money and use it in other businesses. After that, these companies use that cash to grow or make money.
There are a lot of different kinds of investments, but these are the most popular ones:
Buying stocks
When someone buys stock in a company, they become a part-owner of that business. Shareholders are people who own a company’s stock. They can share in its growth and success by seeing the stock price rise and getting regular payments from the company’s profits.
The Bonds
Bonds are a type of debt that businesses, governments, and towns can issue. When you buy a bond, you take on a portion of a company’s debt. In exchange, you will receive interest payments over time and the face value of the bond back when it matures.
The money
Funds are securities that can be invested in stocks, bonds, preferred shares, commodities, etc. Investment managers handle them. Money market funds and exchange-traded funds, or ETFs, are two of the most popular types of funds. Mutual funds don’t trade on an exchange, so their value is set at the end of the trading day. On the other hand, ETFs trade on stock markets, and their value stays the same all day, just like stocks. ETFs and mutual funds can quietly follow indices like the S&P 500 or the Dow Jones Industrial Average, or fund managers can actively move the funds around.
Trusts for Investment
Trusts are yet another way to pool your money. One of the most well-known in this group is the Real Estate Investment Trust (REIT). The rental income from the properties that REITs invest in, whether business or residential, is used to make regular payments to their investors. Because REITs sell on stock exchanges, their investors can get their money immediately.
Different Investments
Alternative investing is a broad term for hedge funds and private equity. Hedge funds can protect their bets on investments by buying and selling stocks and other things. Private equity lets businesses get money without going public. Hedge funds and private equity were usually only open to wealthy (“accredited investors”) who met specific income and net worth standards. But in the past few years, alternative investments have been put into fund forms that regular investors can use.
Options and other types of derivatives
The value of a derivative is based on the value of another derivative, like a company or an index. A common type of derivative is an options contract, which gives the buyer the right but not the duty to buy or sell a property at a set price within a certain amount of time. Derivatives often use leverage, which makes them a high-risk, high-reward investment.
Food and goods
Commodities include things like metals, oil, grain, and animal goods. They can also be financial instruments and currencies. ETFs or commodity futures can be used to trade them. Commodity futures are contracts to buy or sell a certain amount of a product at a specific price on a specific date. You can hedge your risk with commodities or use them for speculation.
Comparing Different Ways to Invest
Let’s look at two of the most popular ways to invest:
Active investing vs. passive investing: The goal of active investing is to “beat the index” by handling the investments yourself. Passive investing, on the other hand, suggests a more passive method, like buying an index fund, because it is hard to beat the market consistently. Passive and active management has good and bad points, but most fund managers don’t beat their standards often enough to make the extra costs of active management worth it.
Growth vs. value: Growth investors invest their money in high-growth companies, which usually have higher valuation measures like Price-Earnings (P/E) than value companies. Value investors look for companies with much lower PEs and higher income yields than growth investors. This is because growth companies may not be popular with investors now or for long.
How to Put Your Money to Work
Investing in Your Own
The answer to “how to invest” depends on whether you like to do things yourself (DIY) or would rather have a professional handle your money. Many buyers who like to keep their money in their accounts use discounts or online brokerages because they offer low fees and make it easy to make trades.
Self-directed investing is another name for do-it-yourself investing. It takes a lot of knowledge, skill, time, and emotional control to do it right. If any of these things don’t sound like you, it might be better to let a professional handle your finances.
Investing managed by professionals
Wealth managers usually take care of the investments of people who want skilled money management. As a fee, wealth managers usually take a cut of the assets that are under their care (AUM). Professional money management costs more than handling your own money. Still, some investors are willing to pay more to have someone else do the research, make investment decisions, and trade their money.
The SEC’s Office of Investor Education and Advocacy tells people thinking about investing to ensure that the person they are working with is licensed and registered.
Robo-advisor Putting Money
Some investors put their money where automatic financial advisors tell them to. Robo-advisors use algorithms and artificial intelligence to learn essential things about the user and their risk tolerance to make suitable suggestions. With little to no help from a person, Robo-advisors are a cheap way to invest that offers services similar to those of a human financial advisor. Robo-advisors can now do more than pick stocks thanks to technological progress. They can also help people make plans for retirement and take care of trusts and other savings accounts, like 401(k)s.
A Short History of Putting Money Away
The idea of investing has been around for thousands of years, but investing as we know it today is rooted in the 17th and 18th centuries when the first public markets were created to connect investors with investment possibilities. The Amsterdam Stock Exchange opened in 1602, and the New York Stock Exchange (NYSE) opened in 1792.
Investing in the Industrial Revolution
The Industrial Revolutions of 1760–1840 and 1860–1914 improved things for everyone. As a result, people saved money to spend, which helped banks become more advanced. Most big investment banks, like Goldman Sachs and J.P. Morgan, have been around since the 1800s. Michael Morgan.
Investing in the 20th Century
As the 20th Century went on, new ideas in asset price, portfolio theory, and risk management broke new ground in investment theory. Many new ways to trade came out in the second half of the 20th Century. These include hedge funds, private equity, venture capital, REITs, and ETFs.
In the 1990s, the fast growth of the Internet made online trading and study available to everyone. This finished making investing more open to everyone, which had begun more than a hundred years earlier.
Investing in the 21st Century
The dot-com bubble burst, making a new generation of millionaires through investments in tech-driven and online business stocks. It was the start of the 21st Century and may have set the stage for what was to come. In 2001, the fall of Enron, which was full of fraud and put the company, its accounting firm Arthur Andersen, and many of its owners out of business, was the big story.
The Great Recession (2007–2009), in which many investments in mortgage-backed securities failed and hurt businesses worldwide, is one of the most important events of this Century or any other time in history. Many big banks and finance firms failed, many homes foreclosed on, and the wealth gap increased.
New investors and investors who don’t usually spend have also been able to get into investing thanks to the rise of discount online investment firms and free trading apps like Robinhood.
Saving money vs. guessing
Three things determine whether buying a security is spending or speculating:
How much risk is taken: Investing has less risk than gambling.
The time that the investment is held: holding periods for investments are usually more extended, measured in years, while holding periods for gambling are much shorter.
Source of returns: Price growth may not be the most crucial part of investment returns; profits or other payments may be significant. When you speculate, the primary way to make money is for prices to increase.
Since price changes are a popular way to measure risk, it makes sense that a stable blue chip is much safer than a cryptocurrency. So, buying a blue chip company that pays dividends and planning to hold on to it for a few years would be considered an investment. On the other hand, someone who buys a cryptocurrency with the plan to sell it quickly for a profit in a couple of days is gambling.
An example of a return on investment
Let’s say you bought 100 shares of XYZ stock for $310 and then sold them for $460.20 a year later. What was your total gain if you didn’t count the commissions? Remember that XYZ does not pay out stock payments. The capital gain would be (($460.20 – $310)/$310) x 100%, which equals 48.5%.
Let’s say that XYZ paid dividends while you were hanging on to the shares and got $5 per share. That’s about a 50.11 percent return (capital gains of 48.5% plus dividends of $500 on $31,000) x 100%, or 1.61%.
How do I begin investing?
You can do it yourself and choose investments based on how you like to invest, or you can get help from a professional investor, like a broker or planner. You should know what you want and how much risk you will take before you spend. If you don’t like taking risks, stocks and options might not be the best choice for you. Based on your goals and tastes, plan how much to invest, how often, and what to invest in. Before putting money into an investment, you should look into it to ensure it fits with your strategy and can give you the results you want. Remember that you don’t need much money to start; you can make changes as your needs change.
What Are Some Different Types of Bets?
You can invest in a lot of different things. Stocks, bonds, real estate, and ETFs/mutual funds are some of the most popular. Real estate, CDs, annuities, cryptocurrencies, commodities, collectibles, and rare metals are other types of investments you might want to consider.
Is investing a good way to make money?
Investing isn’t just for rich people. You can put in small amounts of money. You could buy cheap stocks, put small amounts of money into a savings account that earns interest, or save until you have a certain amount to spend. If your job has a retirement plan, like a 401(k), put small amounts of your pay into it until you can put more money in. If your company matches your contributions, you may find that your initial investment has grown by two times.
You can put your money into mutual funds, stocks, bonds, or an IRA. With $1,000 to start, you can’t go wrong. You would now have millions if you put $1,000 into Amazon’s IPO in 1997. This was primarily because of several stock splits, but that doesn’t change the huge gains. Most banks and credit unions offer savings accounts; you don’t need much money to open one. Most savings accounts don’t offer high interest rates, so compare rates and benefits to find the best account.
You can put $1,000 into real estate if you want to. You might not be able to buy a building that makes money, but you can put your money into a business that does. There is a real estate investment trust (REIT) business that buys and takes care of real estate to make money. You can put your $1,000 into mutual, exchange-traded, or REIT stocks.
Investing and gambling: Is it the same thing?
No, gambling and buying are not at all the same. When you invest, you put your money into things or projects you think will earn you back over time. These things or projects have good expected returns. You bet on how events or games will turn out when you gamble. Nothing is being done with your money. A lot of the time, gambling has a negative predicted return. An investment can lose money, but that will only happen if the project fails. In gambling, on the other hand, the result is entirely up to chance.
Conclusion
- Investing means putting money into activities or projects you think will earn you back in the long run.
- Different types of projects and assets give different kinds of returns. For example, real estate can give you both rent and capital gains. Many stocks pay dividends every three months, and bonds usually pay interest regularly.
- When you buy, risk and return are like two sides of the same coin. Low risk usually means low expected returns; high returns usually mean higher risk.
- People who want to invest can do it themselves or hire a skilled money manager.
- Buying a property is either investing or speculating, depending on the amount of risk, the time held, and the source of returns.
