What is Investing?
When we think about earning cash, it’s usually in quite simple terms – You go to work, you put in the hours, and you get paid. For most of us, this is an unavoidable part of life… but it isn’t the only way to make money. Many people have realised that, in the right circumstances, money can actually grow all by itself. Certain things tend to increase in value over time and enough of them together may create a whole new source of income for a savvy financier. In the right hands, a few profitable assets may even provide you with more funds than your actual job! It sounds simple enough, but at its core, this strategy involves a lot of clever investing. So what does that entail? What does investing really mean and how important is it anyway? What is the Definition of Investing?
Investing is simply the process of buying or creating an asset in an attempt to grow your money over time. In other words, you buy or create an item* and keep possession of it for a period of time in the hopes that it will increase in value or begin to generate capital.
Investing can take many forms as there is a multitude of assets that can be purchased or created. Commonly, people will invest in things like stocks, bonds and real estate, although there are many other possible investment options including things like commodities and pension funds.
*It should be noted that certain intangible goods and services can also be considered investments. If, for example, you spend money on furthering your education in an attempt to improve your qualifications and thus increase your earning capacity – you may think of it as an investment.
What is the Purpose of Investing?
As discussed, investing allows you to grow your money over time. Once your investment starts to increase in value, you can sell it for a profit or you can begin receiving money generated from either the interest or from the asset itself. Additionally, investors may also receive dividends if they put their money into stocks.
Is Investing a Business?
While many people use investing as a means to generate some extra income on the side, in some cases, investing itself can become a type of business. Various investment companies exist all around the world and usually take the practice to a professional level.
Instead of having many individuals each making their own private investments, investment companies pool the funds of their clients together and invest on their behalf. These companies tend to focus more on long-term investments and hold various benefits over individual investors, for instance –
- Investment companies usually employ various experts whose job it is to make the best possible financial choices. As a result, such companies normally operate with more knowledge and expertise than is available to the average person.
- An increase in funds allows for further asset diversification which helps to mitigate certain risks
- Clients are given a broader scope of investment options than they would otherwise have access to.
Examples of Investing
Now that we’ve covered the basics, let’s take a look at a few examples of investing that you may come across in your day-to-day life.
Types of Investments
|Stocks – Buying shares in a company grants you a portion of ownership in that business. If the company performs well, your shares may increase in value and you will be able to sell them for a much higher price. That said, shares can also decrease in value if the business begins to perform poorly so make sure that you do your homework before investing heavily in any particular kind of stock.
|Bonds – Unlike stocks, bonds do not represent a portion of ownership in an organisation and can instead be viewed as a type of loan given by you (the investor) to the company or government. Bonds can be great investment opportunities as they generally include payments of interest over time as well as a repayment of the original investment, however, a failing business can result in losses for the investor, similar to those seen in stock purchases.
|Real Estate – While there are some notable exceptions to the rule, property value tends to increase over time, making it a strong investment medium overall. Notably, this doesn’t just refer to people buying homes and waiting decades for them to improve as investments. Many buyers also make money by renting out properties or by renovating rundown areas before selling them for a massive profit.
|Mutual Funds – As mentioned, some groups make a business out of collecting capital from multiple individuals and investing it in various stocks and bonds. These mutual funds can prove to be great investment vehicles as they are usually overseen by professionals with a high degree of expertise in the matter.
|Commodities – If you’re not a fan of stocks and bonds, you can also invest in physical materials known as commodities. Things like gold, oil and wheat are all examples of commodities and can provide a certain level of risk protection for less adventurous investors. One of the best things about dealing with commodities is that they tend to increase in value alongside inflation rates which can often make them a much safer investment overall.
Obviously, there are many more examples that can be considered but hopefully, this list gives you a broad understanding of the versatility that can be found in the world of investments.
What is Diversification and Why is it Important when investing?
Regardless of the topic, experts seldom agree on any one point, so when they actually manage to come to a consensus, it’s probably best to listen to them – This is the case with diversification.
Diversification refers to the practice of investing in a wide array of industries and asset types to ensure that you’re better protected against potential risks. In short, you can imagine how horrible it would be if you put all of your money into real estate right before the property market crashed. To prevent this kind of thing, savvy investors tend to put their capital into various assets which will be affected differently by market fluctuations.
“Don’t put all your eggs in one basket” is an old proverb but it applies quite perfectly to modern-day investing. Make sure that the crash of one specific market doesn’t have disastrous effects on all of your investments and you’ll be in a much better position to recover from your losses.
In Conclusion – What does Investing Mean and What are Some Examples?
Investing occurs anytime you put money towards something with the intent of increasing its value over time. Oftentimes, investors will purchase an asset and simply wait until their sale becomes profitable but there are more active methods of investing that can also be exploited to make money. If you purchase a property, for example, you may choose to rent it out to tenants until that source of income exceeds the original cost. Additionally, many investors may purchase bonds to make money off of the interest that they generate. It is also possible to view educational advancements as a type of investment if they result in an increase in earnings.
One type of asset may provide multiple investment opportunities, for example, after buying a property, an investor can rent it out, renovate and sell it in the short term, or simply wait a number of years for it to steadily increase in value. That said, some investments tend to be safer than others and it may be a good idea to hedge your bets with certain commodities as they usually increase in value as inflation rates rise.
Some individuals may choose to pool their resources and invest collectively, this type of mutual fund is a common service provided by investment companies. These groups tend to hire financial experts to help mitigate risks and make beneficial investment decisions.
One of the most important elements of investing involves the diversification of portfolios. If all your investments are tied up in one industry or asset type, a sudden downward turn in that area could have serious repercussions for your financial prospects. For this reason, experts advise investors to spread out their capital to ensure that one negative change can’t have too much of an impact and that the growth of other assets may be able to cushion the blow.
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