Investing is an extremely complex topic. Learn about broad definition of this term, what are the types of investments, what are different types of investments, what are the risks associated with them, and how to distinguish between investing and speculation.
Investing is, broadly speaking, a process of putting money to work for a period of time in some sort of project or undertaking in order to generate profits. In other words, it is the act of allocating resources (usually capital) with the expectation of generating an income, profit, or gains. Investing may help you achieve your financial goals, like creating a college fund for your kid, buying an apartment or securing your retirement.
Is investing for everyone?
In theory anyone can invest, but in order to do that responsibly, you need not only money and strong will, but also financial knowledge, patience and available time to learn more. A dash of luck won’t hurt either. If you are not up for it, there are many services that can help you with investing, such as advisory (including roboadvisory).
What are some common types of investments?
There are many (if not infinite) ways to invest money, which differ greatly. They come with different risks, profit margins or entry thresholds. The most popular of them are (in random order):
- investment funds,
- real estate,
As we stated before, investments usually differ from one another. For example,in general,deposits and bonds are relatively safe, but not so profitable. On the other hand, crypto-assets are extremely volatile and risky to the extent of losing all your money, but you might earn a multiple of the amount you invested. Risks and profit expectations can also vary within the same asset type: blue chips will perform differently than penny stocks.
Endeavors differ from each other in type of generated returns, for example, holding stocks may entail dividend payments and real estate may produce rents or capital gains. It’s also important to remember that different types of income may be taxed at different rates.
Is investing risky?
The short answer is: yes. Every investment activity comes with some level of financial, legal or other form of risk or responsibility. As an investor, your main goal will be to manage different kinds of risks that you’ll encounter. There are different ways to mitigate them, for example by creating an investment plan or so-called diversification of your wallet. You’ll also have to watch out for grifters and snake oil salesmen, trying to scam you out of your money.
What are the differences between investing, saving and speculating?
Generally, investing is putting money to work in order to generate profits. Saving is putting money aside for future use in order to cover daily expenses or to have a financial cushion in case of unexpected expenses or events.
Speculation is more similar to gambling, as it is betting on short-term price fluctuations. Assessment, whether the transaction is speculative in its nature or not relies on three aspects:
- level of risk – speculation involves higher risk levels;
- holding period of the investment – speculation involves very short holding period;
- source of returns – in speculation price appreciation is generally the main source of returns in oppose to dividends or distributions, which are important in investing