One of the greatest “joys” of becoming an adult is dealing with financial responsibilities. No more asking dad or mum for something extra the moment we run out of pocket money, no more helpful gifts from an uncle or aunt or grandparent – now we are entirely on our own. As a result, every adult faces a lot of worry, stress, tension due to financial issues; even if a person has a decent income in hand, he or she still worries about what the future holds and whether they would have enough money to deal with their financial responsibilities (liabilities) in future.
This is where investment can come to your rescue. The investments that you make today can give you peace of mind and enable you to have a much better control (greater control) over the future. In this short article, we will quickly (and simply) explain the basics of investing and thus ensure that you have greater power over your financial future.
So, what are we waiting for – let us learn about investing! We begin with a very simple idea – the investment definition.
The definition of investment
All of us have heard the admonition that we must learn to save money because money does not grow on trees, money does not grow by itself and so on. But would it not make life simpler and so much more fun if money did actually grow all by itself? Investment is the magic wand that enables money to grow by itself, multiply itself. In simple terms, when we commit our money to something with the expectation of getting some profit or getting some additional income in future, we are essentially making an investment. Thus, investment is simply the act of committing some money for future profit.
For example, suppose you buy shares of a company with the belief or expectation that the shares would gain in value in future and thus, you would be able to sell them later for a profit. Or, suppose you buy a company’s shares with the hope that the dividend paid by the company would be an additional source of income for you. Both of these cases are examples of investment. Let us look at some more types of investments.
Types of investment
There are many different types of investment. But, do not worry – we will not let you be confused or puzzled by these. For your benefit, we will classify investments into just three basic categories – owned assets, lending, and cash equivalents.
Owned assets can be of many different types. For example, you may buy some shares of a company. Buying shares of a company essentially means that you have purchased a portion of the company. A profitable company will often pay dividend on its shares. This dividend serves as additional income for you. Further, a company’s shares may gain in value – thus yielding a profit in case you choose to sell the shares in future. Hence, owned assets can provide an additional source of income as well as a profit.
Similarly, you may choose to start a business – either in partnership with some other people or all by yourself. This is one example of capital investment (sometimes also referred to as business investment). Capital investment in its simplest definition means putting your money in a company in order to enable the company to run its business or expand its business.
You may also invest your money by buying a piece of land or a home or warehouse. You may then rent out these units to other people or to some company. The rent that you earn on these properties will provide you some additional income. Further, just as in the case of shares, these properties may gain in value with time and hence, you may be able to sell them at a profit in future.
Another common investment option is purchasing precious items, for example, gold, silver, etc. Such items are often purchased with the expectation that they will gain in value and hence, will yield a profit when sold at a later date.
Instead of purchasing some asset (like shares or property or some precious item), you may also invest by lending your money. Bonds issued by companies or by various governments are examples of lending instruments. When you purchase a bond from a company, you are essentially lending your money to the company. The company promises that it wou