What is Investment
An investment is an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
Investing is putting money to work to start or expand a project or to purchase an asset or interest. Where those funds are then put to work, with the goal to income and increased value over time. The term “investment” can refer to any mechanism used for generating future income. In the financial sense, this includes the purchase of bonds, stocks or real estate property among several others. Additionally, a constructed building or other facility used to produce goods can be seen as an investment. The production of goods required to produce other goods may also be seen as investing.
Taking an action in the hopes of raising future revenue can also be considered an investment. For example, when choosing to pursue additional education, the goal is often to increase knowledge and improve skills in the hopes of ultimately producing more income. Because investing is oriented toward future growth or income. There is risk associated with the investment in the case that it does not pan out or falls short. For instance, investing in a company that ends up going bankrupt or a project that fails. This is what separates investing from saving saving is accumulating money for future use that is not at risk, while investment is putting money to work for future gain and entails some risk.
Investment is the act of putting money to work to start or expand a business or project or the purchase of an asset, with the goal of earning income or capital appreciation.
Investment is oriented toward future returns and thus entails some degree of risk.
Common forms of investment include financial markets (e.g. stocks and bonds), credit (e.g. loans or bonds), assets (e.g. commodities or artwork), and real estate.
Investment and Economic Growth
Economic growth can be encouraged through the use of sound investments at the business level. When a company constructs or acquires a new piece of production equipment in order to raise the total output of goods within the facility. The increased production can cause the nation’s gross domestic product (GDP) to rise. This allows the economy to grow through increased production based on the previous equipment investment.
The IS-LM model, which stands for “investment-savings” (IS) and “liquidity preference-money supply” (LM) is a Keynesian macroeconomic model that shows how increases in investment at a national level translate to increases in economic demand, and vice-versa.
An investment bank provides a variety of services designed to assist an individual or business in increasing associated wealth. This does not include traditional consumer banking. Instead, the institution focuses on investment vehicles such as trading and asset management. Financing options may also be provided for the purpose of assisting with the these services.
Investment banking is a specific division of banking related to the creation of capital for other companies, governments and other entities. The banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions, reorganizations and broker trades for both institutions and private investors. Investment banks also provide guidance to issuers regarding the issue and placement of stock, such as with an IPO or rights offering.
Investments and Speculation
Speculation is a separate activity from making an investment. Investing involves the purchase of assets with the intent of holding them for the long term. Speculation involves attempting to capitalize on market inefficiencies for short-term profit. Ownership is generally not a goal of speculators, while investors often look to build the number of assets in their portfolios over time.
Although speculators are often making informed decisions, speculation cannot usually be categorized as traditional investing. Speculation is generally considered higher risk than traditional investing, though this can vary depending on the type of investment involved. Some consider speculation more akin to gambling than anything else.
Types of Investments
- Mutual funds
- Exchange traded funds
- Certificate of Deposite
- Retirement plans
- The bottom line
Stocks may be the most well-known and simple type of investment. When you buy stock, you’re buying an ownership share in a publicly traded company. Many of the biggest companies in the country — think General Motors, Apple and Facebook — are publicly traded, meaning you can buy stock in them.
When you buy a stock, you’re hoping that the price will go up so you can then sell it for a profit. The risk, of course, is that the price of the stock could go down, in which case you’d lose money.
Brokers sell stocks to investors. You can either opt for an online brokerage firm or work face-to-face with a broker.
When you buy a bond, you’re essentially lending money to an entity. Generally, this is a business or a government entity. Companies issue corporate bonds, whereas local governments issue municipal bonds. The U.S. Treasury issues treasury bonds.
After the bond matures — that is, you’ve held it for a predetermined amount of time — you earn back the principal you spent on the bond, plus a determined rate of interest.
The rate of return for bonds is typically much lower than it is for stocks, but bonds also tend to be lower risk. There is some risk involved, of course. The company you buy a bond from could fold, or the government could default. Treasury bonds especially, however, are considered a very safe investment.
A mutual fund is a pool of many investors’ money that is invested broadly in a number of companies. Mutual funds can be actively managed or passively managed. An actively managed fund has a fund manager who picks companies and other instruments in which to put investors’ money. Fund managers try to beat the market by choosing investments that will increase in value. A passively managed fund simply tracks a major stock market index like the Dow Jones Industrial Average or the S&P 500. Some mutual funds invest only in stocks, others only in bonds and some in a mixture of the two.
Mutual funds carry many of the same risks as stocks and bonds, depending on what they are invested in. The risk is lesser, though, because the investments are inherently diversified.
Exchange-traded funds (ETFs) are similar to mutual funds in that they are a collection of investments that tracks a market index. Unlike mutual funds, which are purchased through a fund company, ETFs are bought and sold on the stock markets. Their price fluctuates throughout the trading day, whereas mutual funds’ value is simply the net value of your investments.
ETFs are often recommended to new investors because they’re more diversified than individual stocks. You can further minimize risk by choosing an ETF that tracks a broad index.
Certificates of Deposit
A certificate of deposit (CD) is a very low-risk investment. You give a bank a certain amount of money for a predetermined amount of time. When that time period is over, you get your principal back, plus a predetermined amount of interest. The longer the loan period, the higher your interest rate.
There are no major risks to CDs. They are FDIC-insured up to $250,000, which would cover your money even if your bank were to collapse. That said, you have to make sure you won’t need the money during the term of the CD, as there are major penalties for early withdrawals.
There are a number of types of retirement plans. Workplace retirement plans, sponsored by your employer, include 401(k) plans and 403(b) plans. If you don’t have access to a retirement plan, you could get an individual retirement plan (IRA), of either the traditional or Roth variety.
Retirement plans aren’t a separate category of investment, per se, but a vehicle for making investments, including purchasing stocks, bonds and funds. The biggest advantage for retirement plans — other than Roth IRA plans — is that you put in pre-tax dollars. You won’t pay taxes on the money until you withdraw it in retirement, when you will presumably be in a lower tax bracket. The risks for the investments are the same as if you were buying the investments outside of a retirement plan.
An option is a somewhat more complicated way to buy a stock. When you buy an option, you’re purchasing the ability to buy or sell an asset at a certain price at a given time. There are two types of options: call options, for buying assets, and put options, for selling options.
The risk of an option is that the stock will decrease in value. If the stock decreases from its initial price, you lose your money. Options are a highly advanced investing technique and you must get approval to participate in the options market.
Many people use annuities as part of their retirement savings plan. When you buy an annuity, you purchase a contract with an insurance company and, in return, you get periodic payments. The payments may begin right away or at a specified future date. They may last until death or only for a predetermined period of time.
While annuities are fairly low risk, they aren’t high-growth. They make a good supplement to retirement savings, rather than an integral source of funding.
Cryptocurrencies types of investment
Cryptocurrencies are a fairly new investment option. Bitcoin is the most famous cryptocurrency, but there are countless others. Cryptocurrencies are digital currencies that don’t have any government backing. You can buy and sell them on cryptocurrency exchanges. Some retailers will even let you make purchases with them.
Cryptos often have wild fluctuations, making them a very risky investment.
Commodities are physical products you can buy. They could be agricultural products like wheat, barley and corn, or energy products like oil, coal or solar power. Precious metals like gold and silver are some of the most common commodities.
Commodities investing runs the risk that the price of the product will go down quickly. For instance, political actions can greatly change the value of something like oil, while weather can impact the value of agricultural products.
The Bottom Line
There are a lot of types of investment to choose from. Some are perfect for beginners, while others require more experience. Each type of investment offers a different level of risk and reward. Investors should consider each type of investment before determining an asset allocation that aligns with their goals.
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