What Actually Is an "Investment"?
Published: 12/20/2022
Investing.University's Definition of an Investment
Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. Investment can take many forms, such as buying stocks, bonds, real estate, or starting a business. The goal of investing is to put money to work in the hopes of growing one's wealth over time.
Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit.
A List of 7 Things That You Can Actually Invest In
Investing is the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit. The main ways to invest are through money and financial markets, real estate, and businesses.
Real estate is a broad term that refers to any property owned by an individual or company. This can include homes, offices, warehouses, factories, farms, and more. Real estate can also refer to land itself and any structures that reside on it (such as homes). Real estate has been an essential part of economies worldwide since humans settled down permanently in one place instead of constantly moving around. There are five main real estate categories: residential, commercial, industrial, raw land, and special use.
A raw material is an intermediate product that is used in the manufacturing of finished goods. Raw materials are also known as primary agricultural products, commodities, and primary goods. The term "raw material" covers many products but generally includes bulk materials such as iron ore, steel, and petroleum.
Commodities are often regarded as physical materials such as metals and minerals, but they can also include some services. A commodity can be classified as a good or service naturally produced in large quantities by many firms in an economy. Commodity markets exist for goods such as oil and gas, grains, precious metals, and other basic needs of human beings.
3. Groups of People Working Towards a Specific Goals (Businesses)
When you invest in a business, you're putting your money into an enterprise where people work towards a specific goal. The idea is that if the business does well, then everyone involved will benefit from it. If it doesn't do well or goes bankrupt, you lose all or part of your investment. The money you put into a business isn't just a loan. You're also buying shares in that company and becoming an owner. Your investment gives you a stake in the company's future, so if it does well, you can share in its profits. If it doesn't do well or goes under, you'll lose all or part of your investment.
4. Finished Products Which Have Value (Tangible Assets)
Finite products are “tangible” assets: they have a physical existence and are not intangible. They can be touched and seen, although they may need to be maintained and repaired.
A person who has finished goods has a completed product ready for sale. This can be done on a small scale by an individual or on a large scale by a company. The difference between the two is that the individual will not usually have the resources to store or sell their products.
5. Knowledge, Brand Name, Patents, and Copyrights (Intangible Assets)
Intangible Assets are non-cash assets that cannot be touched or seen. They are not physical in nature and cannot be sold physically. Examples of intangible assets include patents, copyrights, trademarks, brand names, trade secrets, and goodwill. These assets are typically recorded on the balance sheet as an asset.
6. Individuals With Willingness and Ability to Repay (Loans to People)
The term "individuals with willingness and ability to repay" refers to a borrower's creditworthiness. A borrower with a history of repaying loans on time is more likely to repay their new loan. Borrowers who have had trouble repaying may not qualify for a personal loan.
If you do not have any existing loans, your credit score will be used by lenders to determine whether they are willing to extend your credit. If your credit score is low because of late payments or other issues, you may find it challenging to obtain a new loan. However, if you maintain good credit and pay off your debts on time, lenders will be more likely to extend your credit.
7. The Future of Your Government
The government bond market is a crucial component of the U.S. economy and an essential indicator of economic health. It's also one of the most misunderstood aspects of our financial system.
Bonds are debt instruments issued by governments, companies, and other entities that pay interest regularly. The payments are made to investors who have purchased the bonds.
Examples: Residential house (real estate), heard of goats (commodity), people gathered together for a meeting (business), luxury watch (tangible asset), coca-cola, one of the most recognized brands in the world (intangible assets), a person accepting money (personal loan), and an army (which represents the future success of a government).
5 Types Financial Securities: Things That Often Get Confused As Investments Themselves, But Are Actually Ways By Which You Invest
Are you comfortable with the topic of financial securities and how they work?
1. Stocks (Equity Securities)
A stock is a financial instrument representing a percentage of company ownership. The stock owner has the right to receive profits, paid out in the form of dividends, and to vote on corporate matters. Investors who buy shares of a company's stock become a shareholder.
2. Bonds, CDs, and More (Debt Securities)
A debt security bond represents the borrower's obligation to pay back the loan. The security is usually a promissory note. Bonds are issued for a specific period of time called the maturity date. If you hold the bond until maturity, you receive your original investment plus accrued interest. If you sell before maturity, you receive only what the bond is worth on that date.
Corporations or governments issue bonds at varying maturities: one-week U.S. Treasury bills, 30-year corporate bonds, and 10-year U.S. Treasury notes are examples of different types of bonds with differing maturities.
3. Futures, Options Contracts, and More (Derivative Securities)
A derivative security is a financial instrument whose value is derived from the performance of an underlying asset. Derivative securities include options, futures, swaps, and other contracts. Derivatives are commonly used to hedge risk exposure and for speculative purposes.
4. Home Equity Loans, Credit Cards Loans, and More (Asset-Backed Securities)
Asset-backed securities are securities issued by an investment firm that represents ownership in a pool of other assets. The assets can be various things, including loans, leases, receivables, and even commodities. Typically, these assets are used as collateral for the securities issued.
5. Preferred Stock and Convertible Bonds (Hybrid Securities)
If you invest in a company that has issued convertible bonds or preferred stock, you might be able to convert your investment into shares of common stock. While both convertible bonds and preferred stock are hybrid securities, each has its own unique features.
Categories of Investment: When You Boil Things Down There are Really Only 2-4 (Depending on How You See Things)
Investments can be categorized in many different ways: by asset class, by investment vehicle, and by investment style, for example. Because investments involve financial risk, they may be categorized as speculative, aggressive, or defensive. The term "speculative" implies a higher degree of risk tolerance, which is needed because of higher expected returns.
1. Ownership Investments - Equity in a Business or Possession of Assets and Property
Ownership investments include stocks, bonds, and mutual funds. The investor owns part or all of the company being invested in. Ownership investments are often referred to as equity investments because the investors own a part of the company. The benefit of ownership investments is that they can grow in value over time through dividend payments, stock splits, or capital appreciation. The downside is that the investor loses their money completely if the company goes bankrupt.
2. Lending Investments - Borrow Property, Assets, or Money in Exchange for Repayment
Lending investments include mortgages and bonds. With lending investments, you lend money to someone else (usually another person or a company), and they pay you interest on your loan. There are many different types of lending investments, such as:
- Mortgages (home loans)
- Bonds (loans to governments or companies)
In many ways, lending investments are similar to savings accounts. They’re both based on trust and security. With a savings account, you give your money to a bank, and they promise not to lose it or use it for anything else; with lending investments, you give your money to someone else, and they promise not to lose it or use it for anything else.
3. Cash & Cash-Equivalent (Depending on How You See Things)
Cash equivalents are short-term investments that can be easily converted into cash, held onto for a short time, and sold. Cash equivalents are investments with a maturity of less than one year, making them suitable for cash management. Examples include money market accounts, savings accounts, and Treasury bills.
4. Pooled Investments (Depending on How You See Things)
Pooled investments are a type of investment vehicle in which multiple investors pool their money together to create a single investment fund. Pooled investments can include mutual funds, hedge funds, private equity funds and real estate investment trusts (REITs).
Frequently Asked Questions (FAQs)
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Q: What Is a "Good" Investment?
A: Something That Will Ultimately Increase Future Productivity
A good investment is something that will ultimately increase future productivity. The most important thing to remember is that an investment can be anything, from a new piece of equipment or a new building, to an employee education.
Q: Why Should You Invest?
A: Productive Investments Allow You to Have More for the Future
Productive investments are those which will help in creating more value than what they cost. This means that the money invested in them will not be lost but rather used to create more wealth over time.
Q: What Is Return on Investment (ROI)?
A: ROI = (Current Value of Investment - Original Value of Investment) / Original Value of Investment
ROI stands for return on investment, a financial measure that describes how well an investment has performed.
To calculate ROI, you subtract an investment's original cost from that investment's current value and then divide it by the original cost. For example, if you bought a new car for $25,000 and sold it five years later for $20,000, your ROI would be negative: -25%.
If you bought a new car for $25,000 and sold it five years later for $30,000 (a 25% increase), your ROI would be 25%.
Q: What Is Investment Risk?
A: Risk Is Any Uncertainty With Respect to Your Investments That Has the Potential to Negatively Affect Your Financial Welfare.
Risk is any uncertainty with respect to your investments that has the potential to affect your financial welfare negatively.
Risk is an essential element of financial planning - unless you're an investor who prefers safety and security, you must accept the possibility of losses in order to reap the benefits of higher returns.
Q: What Is an Investment Portfolio?
A: An Investment Portfolio Is A Basket Of Assets (Such As Stocks, Bonds And Cash) That Can Provide You With A Variety Of Opportunities To Grow Your Wealth
Investment portfolios are made up of different types of assets, such as stocks, bonds, and cash. Each asset class has its own unique characteristics and risk level. Investing in different asset classes can create a portfolio that matches your risk tolerance and goals.
Q: What Is Investment Diversification?
A: Investment Diversification Means Buying Different Types Of Investments To Reduce The Impact Of Any One Negative Investment Outcome
When investors want to reduce the risk of a portfolio, they can diversify by holding different types of securities. By holding a mix of stocks and bonds, an investor may not lose as much money if one investment goes down. This concept was developed by modern portfolio theory, which argues that holding both equities and bonds will positively impact the risk-adjusted rate of return in a portfolio. The argument is that if you hold only equities, you maximize returns and risk losing all your money.
End of Lesson 1
Investing is the dedication of money to purchase an asset that you expect will increase in value over time. The goal of investing is to make your money grow over time.
Investing involves taking risks, such as the chance that your investment will lose value or not perform as well as you had hoped. But investments can also be relatively safe if you're willing to accept a lower rate of return.
When investing in something, it's important to consider whether it is right for you. That means asking yourself questions like:
What am I investing for? How much do I have available to invest? Do I want a high or low-risk portfolio? Am I comfortable with how much risk I'm taking on? What are my goals? Can I afford to lose this money?
Cheat Sheet - Your Quick Summary
Up Next
There are many different kinds of investments. The most common ones are stocks and bonds, but there are also mutual funds, real estate, art, other collectibles, private businesses, and foreign currencies.
Just like you wouldn't want to buy a new car without knowing what makes it tick, you need to understand how an investment works before you buy into it.
In this article, we'll look at how some of these investments work so that you can understand how they work before putting your money into them.
