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 would pay you a certain rate of interest on the money that you have lent to the company and that, after some time, the company will return the money that you have invested.
Keeping your money in a bank account is another form of lending. In this case, you lend your money to a bank and, in turn, the bank pays you a certain rate of interest on the money that you have lent.
You may also choose to invest your money in various money market funds. These funds are typically considered as cash equivalents since they can be traded quite easily and conveniently (thus enabling you to recover the money that you had invested). Money market funds typically also pay a small rate of interest on the amount that you invest.
These are the most common types of investments. So, by now, you have understood some of the important fundamentals of investing. You must be excited about investing and you must be looking to learn how to invest, how to start investing. We will cover these questions in another short article. Meanwhile, we will leave you with a few quick (and important) tips about investing.
Useful investing tips
By now, you already know the answer to the question – what are the different types of investments. Do remember that it is always a good idea to include different types of assets and instruments in your investment portfolio. Do not put all your eggs in one basket – this is a common and very useful rule of investing. Diversifying your investment portfolio reduces your risk and increases your chances of getting good profits and returns.
Also note that you will easily find many individuals and firms (including your bank) who will be able to offer you various investment services. Always remember to compare the services offered and fees charged by various individuals and firms. This will ensure that you get the best deal possible. Do not rush into any deal without due diligence.
Finally, do note that there is one simple rule that determines what is an investment and what is not. The rule is that there should be a reasonable expectation of getting returns on your investment. Gambling, wild speculation, etc. are not examples of investments. You may read stories of one lottery ticket buyer who made millions – what you do not read are stories of those millions of lottery ticket buyers who never won a single penny. Always invest your money wisely; do not throw your money on get-rich-quick schemes that will almost never yield positive results. Such schemes can only harm you and your financial health.
With this, you are now fully aware of the basics of investing and are ready to take charge of your financial future.
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