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Essay on Investment | Need & Importance

March 19, 2018 by Study Mentor Leave a Comment

Investment is to distribute money or time in the present with a hope of deriving some benefit in the future. Investment has many meaning and can be looked upon through different angles and sides.

The two major and important characteristics of an investment are present offering and future benefit.

For instance, investment in bonds, real states, valuable objects, insurance policies, etc. All these activities involve current sacrifice of consumption for a profit or gain in future.

When we make our investment for a long period of time by confining our needs for the sake of benefits in the future, risks and the expected benefits and return on the invested or the allocated amount is uncertain.

Therefore, the risk and the expected return from the investment are the two concerning factors of the entire investment process.

Table of Contents

Need to invest

We invest to improve and to upgrade our future stability. No one is aware of what fate is stored for them. Investment ensures betterment and protection of one’s life during the peculiar days.

What we invest comes from assets that we own, saved money, etc. By investing the savings today we build and enhance our future needs and dreams.

It may happen that today what we have might not be present with us tomorrow. We have seen many cases that many people leave abandon their parents when they grow up or after marriage, thus to face such situations people invest their savings so that they don’t need to be dependent on others in future.

Investment bears the fruit especially after the ‘Retirement’, when one retires from his/her job the invested amount serves acts like a pillar for their old age, it motivates and uplifts us to live and enjoy life to the fullest without any worries.

Investment should not be made an option but it is a necessity, a need and one should manage their wealth effectively to derive most from it in the future or in the hour of need.

How to invest

We invest because we have goals in our life, and it may be buying a home or saving for child’s education, for medical uncertainties.

For a successful execution, planning provide a good start and meaning to our financial decisions.

It helps us to understand how each and every decision affects and influences other areas of family requirement. It gives a feeling of security and satisfaction that our dreams, goals and life are at a good track.

Investment process

Investment is needed to be carried out effectively and efficiently.

It is like a ladder on which we need to take slow and steady steps after thinking and observing all the conditions carefully.  Before making any investment we should bear in mind the risk and the return relationship associated with it.

We should be determining about the investment objectives and policy security analysis is needed to be carried out. Construction and diversification of the portfolios and evaluation of performance is needed to be reviewed.

Factors influencing investment

Returns, capital appreciation, safety and security of the invested funds play an important role in the selection of investment.

Investment can be done in the various areas but only after analysing those particular areas that what profit or loss can be faced in future.

It can be made in the form of equity, preference shares, real states, money market investments, non-marketable assets   , valuable goods, insurance policy, etc.

Types of investment

Investment can be of many varieties.

Types of investment include alternative and traditional investments.  One can choose according to his will the type under which he/she wishes to invest.

Alternative investment is an investment in tangible assets, real estates, commodities, private equities. Traditional investment is the one associated with the bonds, cash and policies.

These all depends of the investment environment. The decisions to buy/sell properties are taken by individuals, or group of people needs to carry out the processes.

There is a money and capital market where the investor invests according to their needs. The investment can be for a short period of time that is called a short term investment or for a longer period of time called long term investment.

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Essay on investment.

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After reading this essay you will learn about Investment:- 1. Meaning of Investment 2. Importance of Investment 3. Factors Favourable 4. Investment Media.

Essay on the Meaning of Investment:

Investment is the employment of funds with the aim of achieving additional income or growth in value. The essential quality of an investment is that, it involves ‘waiting’ for a reward. It involves the commitment of resources which have been saved or put away from current consumption in the hope that some benefits will accrue in future. The term ‘Investment’ does not appear to be as simple as it has been defined.

Investment has been categorized by financial experts and economists. It has also often been confused with the term speculation. The following discussion will give an explanation of the various ways in which investment is related or differentiated from the financial and economic sense and how speculation differs from investment. It must be clearly established that investment involves long-term commitment.

Financial and Economic Meaning of Investment :

Investment is the allocation of monetary resources to assets that are expected to yield some gain or positive return over a given period of time. These assets range from safe investments to risky investments. Investments in this form are also called ‘Financial Investments’.

From the point of view of people who invest their funds, they are the suppliers of ‘Capital’ and in their view, investment is a commitment of a person’s funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits or the appreciation of the value of their principal capital.

To the financial investor, it is not important whether money is invested for a productive use or for the purchase of second hand instruments such as existing shares and stocks listed on the stock exchanges. Most investments are considered to be transfers of financial assets from one person to another.

The nature of investment in the financial sense differs from its use in the economic sense. To the economist, ‘Investment’ means the net additions to the economy’s capital stock which consists of goods and service that are used in the production of other goods and services.

The term investment implies the formation of new and productive capital in the form of new construction, new producers’ durable equipment such as plant and equipment. Inventories and human capital are included in the economist’s definition of investment.

The financial and economic meaning of investment are related to each other because investment is a part of the savings of individuals which flow into the capital market either directly or through institutions, divided in ‘new’ and second hand capital financing.

Investors as ‘suppliers’ and investor as ‘users’ of long-term funds find a meeting place in the market. In this book, however, investment will be used in its ‘financial sense’ and investment will include those instruments and institutional media into which savings are placed.

Essay on the Importance of Investment:

Investments are both important and useful in the context of present-day conditions.

Some factors that have made investment decisions increasingly important are:

Longer life expectancy or planning for retirement, increasing rates of taxation, high interest rates, high rate of inflation, larger incomes and availability of a complex number of investment outlets.

a. Longer Life Expectancy :

Investment decisions have become significant as people retire between the age of 60 and 65. Also, the trend shows longer life expectancy. The earnings from employment should be calculated in such a manner that a portion is put away as savings. Savings by themselves do not increase wealth; these must be invested in such a way that the principal and income will be adequate for a greater number of retirement years.

The importance of investment decisions is enhanced by the fact that there is an increasing number of women are working in organizations.

Men and women will be responsible for planning their own investments during their working life so that after retirement they are able to have a stable income. Increase in the working population, proper planning for life span and longevity have ensured the need for balanced investments.

b. Taxation :

Taxation is one of crucial factors in any country which introduces an element of compulsion in a person’s savings. There are various forms of savings outlets in our country in the form of investments which help in bringing down the tax level. These are discussed under availability of investment media.

c. Interest Rates :

The level of interest rates is another aspect which is necessary for a sound investment plan. Interest rates vary between one investment and another. These may vary between risky and safe investments; they may also differ due to different benefit schemes offered by the investments.

These aspects must be considered before allocating any amount in investments. A high rate of interest may not be the only factor favouring the outlet for investment. The investor has to include in his portfolio several kinds of investments.

He/she must maintain a portfolio with high risk and high return as well as low risk and low return. Stability of interest is as important as receiving a high rate of interest. This book is concerned with determining that the investor is getting an acceptable return commensurate with the risks that are taken.

d. Inflation :

Every developing economy is phased with the problem of rising prices and inflationary trends. In India, inflation has become a continuous problem since the last decade. In these years of rising prices, several problems are associated coupled with a falling standard of living. Before funds are invested, erosion of the resources will have to be carefully considered in order to make the right choice of investments.

The investor will try and search an outlet which will give him a high rate of return in the form of interest to cover any decrease due to inflation. He will also have to judge whether the interest or return will be continuous or there is a likelihood or irregularly.

Coupled with high rates of interest, he/she will have to find an outlet which will ensure safety of principal. Besides high rate of interest and safety of principal, an investor has to always bear in mind the taxation angle. The interest earned through investment should not unduly increase his taxation burden. Otherwise, the benefit derived from interest will be reduced by an increase in taxation.

e. Income :

Investment decisions have assumed importance due the general increase in employment opportunities in India. The stages of development in the country have accelerated demand and a number of new organizations and services have increased.

Jobs are available in new sectors like software technology; business processing offices, call centers, exports, media, tourism, hospitality, manufacturing sector, banks, insurance and financial services. The employment opportunities gave rise to increasing incomes.

More incomes have increased a demand for investments in order to bring in more income above their regular income. The different avenues of investments can be selected to support the regular income. Awareness of financial assets and real assets has led to the ability and willingness of working people to save and invest their funds for return in their lean period leading to the importance of investments.

Thus, the objectives of investment are to achieve a good rate of return in the future, reducing risk to get a good return, liquidity in time of emergencies, safety of funds by selecting the right avenues of investments and a hedge against inflation.

Essay on the Factors Favourable for I nvestment:

The investment market should have a favourable environment to be able to function effectively. Business activities are marked by social, economic and political considerations. It is important that the economic and political factors are favourable.

Generally, there are four basic considerations which foster growth and bring opportunities for investment. These are legal safeguards, stable currency and existence of financial institutions to aid savings and forms of business organization.

i. Legal Safeguards:

A stable government which frames adequate legal safeguards encourages accumulation of savings and investments. Investors will be willing to invest their funds if they have the assurance of protection of their contractual and property rights.

In India, the investors have the dual advantage of free enterprise and control. Freedom, efficiency and growth are ensured from the competitive forces of private enterprises. Statutory control exerts discipline and curtails some element of freedom. In India, the political climate is conducive to investment since the new economic reforms in 1991 leading to liberalization and globalization.

ii. A Stable Currency:

A well-organized monetary system with definite planning and proper policies is a necessary prerequisite to an investment market. Most of the investments such as bank deposits, life insurance and shares are payable in the currency of the country.

A proper monetary policy will give direction to the investment outlets. As far as possible, the monetary policy should neither promote acute inflationary pressures nor prepare for a deflation model. Neither condition is satisfactory.

Price inflation destroys the purchasing power of investments. Thrift is also penalized when the net interest after taxes received by the investor is less than the rise in the price level, leaving the investor with less total purchasing power than he had at the time of saving.

Inflation occurs generally in unstable conditions like war or floods but in the last decade, it also discernible in peace conditions especially in developing countries because of huge government deficit in creating infrastructure.

Deflation is equally disastrous because the nominal values of inventories, plant and machinery and land and building tend to shrink. An example of the evil effects of deflation can be cited for the period 1929-1933 in the United States when the shrinkage in nominal values came to a point of producing wholesale bankruptcy.

A reasonable stable price level which is produced by wise monetary and fiscal management contributes towards proper control, good government, economic well-being and a well-disciplined growth oriented investment market and protection to the investor.

iii. Existence of Financial Institutions and Services:

The presence of financial institutions and financial services encourage savings, direct them to productive uses and helps the investment market go grow. The financial institutions in existence in India are mutual funds, development banks, commercial banks, life insurance companies, investment companies, investment bankers and mortgage bankers.

The financial services include venture capital, factoring and forfaiting, leasing, hire purchase and consumer finance, housing finance, merchant bankers and portfolio management. Investment bankers are merchants of securities. They buy bonds and stocks of companies for re-sale to investors.

The investment bankers are distinguished from security brokers who act as agents in buying and selling already issued securities for commission. Mortgage bankers sometimes act as merchants and sometimes as agents on mortgage loans generally on residential properties.

They serve as middlemen between investors and borrowers and perform collateral service in connection with loans. Commercial banks and financial institutions also act as mortgage bankers in giving mortgage loans and servicing the loans.

In India, there are a large number of financial institutions under Central Government and State Governments and rural bodies that have encouraged the growth of savings and investment. The Life Insurance Corporation and Unit Trust of India offer a wide variety of schemes for savings and give tax benefits also.

Apart from these, there is a well-organized network of development banks such as the Industrial Development Bank of India (IDBI), Industrial Credit Investment Corporation of India (ICICI) and Industrial Finance Corporation of India (IFCI).

At the state level, there are State Financial Corporation, for rural areas and agriculture, the National Bank of Agriculture and Rural Development (NABARD). These financial institutions and development banks offer a wide variety of policies for encouraging savings and investment. These institutions lend an element of strength to the capital market and promote discipline while encouraging growth.

Since 1991, there has been a development of the private corporate sector. Many new financial institutions have emerged in the private sector. Insurance companies, mutual funds and venture capitalists leasing companies have been opened up to private financing agencies.

Foreign banks have been allowed to do business. Thus, there is the presence of a large number of institutions and services which channel the funds in productive directions.

iv. Form of Business Organization :

The form of business organization which is permanent in existence aides savings and investment. The public limited companies have been said to be the best form of organization. The three characteristics of the corporation which have been very useful for investors are limited liability of shareholders, perpetual life and transferability and divisibility of stocks and shares.

The public limited company with the ability to continue its business irrespective of members comprising it, gives longevity and soundness to its business activity.

In contrast to a public limited company whose shareholders have limited liability, the sole proprietor or a partner in a partnership firm is liable for all the debts of the firm to the full extent of his personal wealth. In these conditions, investors are hesitant to risk their savings in these forms of organizations.

Besides unlimited liability, the partnership and proprietor also suffer from short life of the organization. With the death or retirement of any of the partners, a partnership firm is dissolved. Similarly, a sole proprietor carries on business only during his lifetime.

In these unstable and unsure conditions, investors would not like to make their investments. Finally, the public limited company lends an element of liquidity to its shares. In contrast, partnership restricts stability and transferability freely from person to person. The public limited company, therefore, is a popular form for investment as the investors benefit from liquidity, convenience and longevity.

In India since 1991, there is the existence of large corporate organizations. There have been many mergers and amalgamations and consolidation has taken place.

Business has become more permanent in nature. Family businesses have expanded and are now stable and well organized. Indian business is taking new forms and being recognized in the world. With increased awareness and stability, the investor has many favourable outlets for making investments.

v. Choice of Investment :

The growth and development of the country leading to greater economic activity has led to the introduction of a vast array of investment outlets. Apart from putting aside savings in savings banks where interest is low, investors have the choice of a variety of instruments. The question to reason out is which is the most suitable channel? Which media will give a balanced growth and stability of return?

The investor in his choice of investment will have to try and achieve a proper mix between high rate of return and stability of return to reap the benefits of both. Some of the instruments available are equity shares and bonds, provident fund, life insurance, fixed deposits and mutual funds schemes.

vi. Risk-Less Vs. Risky Investments :

Most investors are risk averse but they expect maximum return from their investment. Every investment must be analysed because there is definitely some risk in it. The Indian investment scene has many schemes to offer to an individual. On an analysis of these schemes, it appears that the investor has a wide choice.

A vast range of investments is in the government sector. These are mostly risk free but low return yielding. Several incentives are attached to it. The private sector investments consist of equity and preference shares, debentures and public deposits with companies. These have the features of high risk. Ultimately, the investor must make his investment decisions.

The dilemma faced by the Indian investor is the reconciliation of profitability, liquidity and risk of investments. Government securities are risk free and the investor is secured.

However, to him the return or yield is very important as he has limited resources and would like to plan an appreciation of the investments for his future requirements. Government securities give low returns, and do not fulfil his objective of money appreciation.

Private sector securities are attractive though, risky. The success stories of Reliance, Infosys, Wipro give to the investor the dream of future appreciation of investment by several times.

The multinational and blue chip companies offer very high rates of return and also give bonus shares to their shareholders. Food Specialties Limited, Cadburys, Colgate Palmolive, Hero-Honda have been known to raise the hopes of investors by giving high rates of return.

Real Estate and Gold have the advantage of eliminating the impact of inflation, since the price rises experienced by them have been very high. The Indian investor in this context cannot choose his investments very easily.

An investor can maximize returns with minimum risk involved if he carefully analyses the information published in the prospectuses of private companies. Contents as the past performance, name of Promoters and Board of Directors, the main activities, its business prospects and selling arrangements should be assessed before the investor decides to invest in the company.

From the point of view of an investor, convertible bonds, may under proper conditions, prove an ideal combination of high yield, low risk and potential of capital appreciation.

If private companies would offer a wider range of investments to the public, they would be able to mobilize a larger part of pubic savings and at the same time, the investor would be enabled to make a better choice. This would solve his dilemma of being at the crossroads.

Investment Media :

In India, many types of investment media or channels are available for making investments. A sound investment program can be constructed if the investor familiarizes himself with the various alternative investments available.

Investment media are of several kinds. Some are simple and direct, others present complex problems of analysis and investigations. Some are familiar; others are relatively new and unidentified. Some investments are appropriate for one type of investor and another may be suitable to another person.

The ultimate objective of the investor is to derive a variety of investments that meet this preference for risk and expected return. The investor will select the portfolio which will maximize his utility. Securities present a wide range of risk-free instruments to highly speculative shares and debentures. From this broad spectrum, the investor will have to select those securities that maximize his utility.

The investor, in other words, has a optimization problem. He has to choose the security which will maximize his expected returns subject to certain considerations. The investment decision is of optimizing returns but risk taking capacity varies from investor to investor.

It is not only the construction of a portfolio that will promise the highest expected return but it is the satisfaction of the need of the investor. For instance, one investor may face a situation when he requires extreme liquidity.

He may also require safety of securities. Therefore, he will have to choose a security with low returns. Another investor would not mind high risk because he does not have financial problems but he would like a high return. Such an investor can put his savings in growth shares as he is willing to accept risk. Another important consideration is the temperament and psychology of the investor.

Some investors are temperamentally suited to take risks; there are others who are not willing to invest in risky securities even if the return is high. One investor may prefer safe government bonds whereas another may be willing to invest in blue chip equity shares of a company. Many alternative investments exist. These can be put into different categories. The investment alternatives are given below in Table 1.3.

a. Direct and Indirect Investments :

These media alternatives have basically been categorized as direct and indirect investment alternatives. Direct investments are those where the individual makes his own choice and investment decision. Indirect investments are those in which the individual has no direct hold on the amount he invests.

He contributes his savings to certain organizations like Life Insurance Corporation (LIC) or Unit Trust of India (UTI) and depends upon them to make investments on his and other people’s behalf. So there is no direct responsibility or hold on the securities.

An individual also makes indirect investment for retirement benefits, in the form of provident funds and pension, life insurance policy, investment company securities and securities of mutual funds. Individuals have no control over these investments. They are entrusted to the care of the particular organization.

The organizations like Life Insurance Corporation or Unit Trust of India, provident funds are managed according to their investment policy by a group of trustees on behalf of the investor.

The examples of indirect investment alternatives are an important and rapidly growing segment of our economy. In choosing specific investments, investor will need definite ideas regarding a number of features that their portfolio should have.

b. Fixed and Variable Principal Securities :

Fixed principal investments are those whose principal amount and the terminal value are known with certainty. Cash has a definite and constant rupee value, whether it is deposited in a bank or kept in a cash box. It does not earn any return.

Savings accounts have a fixed return; they differ only in terms of time period. The principal amount is fixed plus interest earned. Savings certificates are quite recent some examples being national savings certificates, bank savings certificates and postal savings certificates. Government bonds, corporate bonds and debentures are sold having a fixed maturity value and a fixed rate of income over time.

The variable principal securities differ from the fixed principal securities because their terminal values are not known with certainty. The price of preference shares is determined by demand and supply forces even though preference shareholders have a fixed return.

Equity shares also have no fixed return or maturity date. Convertible securities such as convertible debentures or preference shares can convert themselves into equity shares according to certain prescribed conditions and thus have features of fixed principal securities supplemented by the possibility of a variable terminal value.

Debentures, preference shares and equity shares are examples of securities sold by corporations to investors to raise necessary funds.

c. Non-Security Investments :

‘Non-Security Investments’ differ from securities in other categories. Real estate may be the ownership of a single home or include residential and commercial properties.

The terminal value of real estate is uncertain but generally there is a price appreciation, whereas depreciation can be claimed in tax. Real estate is less liquid than corporate securities. Mortgages represent the financing of real estate. It has a periodic fixed income and the principal is recovered at a stated maturity date.

Commodities are bought and sold in spot markets; contracts to buy and sell commodities at a future date are traded in future markets. Business ventures refer to direct ownership investments in new or growing business before firms sell securities on a public basis. Art, antiques and other valuables such as silver, fine china and jewels are also another type of specialized investments which offer aesthetic qualities also.

These features should be consistent with the investors’ objectives and in addition should have additional conveniences and advantages. The following features are suggested for a successful selection of investments.

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• Difference between Investment and Speculation
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Essay on Investment

Students are often asked to write an essay on Investment in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

Let’s take a look…

100 Words Essay on Investment

What is investment.

Investment means putting money into something, like a business or property, hoping it will grow over time. Imagine planting a seed and waiting for it to become a fruit-bearing tree. That’s what investing is like. You wait for your money to grow.

Types of Investments

There are many ways to invest. You can put your money in stocks, bonds, or savings accounts. Stocks are shares in a company. Bonds are like loans to the government or companies. Savings accounts are safe places in banks.

Risks and Rewards

Investing can be risky because you might lose money. But if you choose wisely and wait, you could earn more than you started with. It’s like gambling, but with research and patience, you can win.

Saving vs. Investing

Saving means keeping money for later. Investing is using money to make more money. Saving is safer but grows slowly. Investing can be faster but has risks. It’s important to balance both.

250 Words Essay on Investment

Investment is like planting a seed and watching it grow. You give your money to a business or a project, hoping it will become more over time. Just like watering a plant, you must take care of your investment for it to grow.

There are many places to put your money. You can buy stocks, which are small parts of a company. If the company does well, so do you. Bonds are like loans you give to the government or companies, and they pay you back with interest. Real estate means buying land or buildings, which can make money if their value goes up.

Investing can be risky because there is no promise your money will grow. Sometimes, you can lose money. But if you choose wisely and wait patiently, you might earn more than you started with. It’s important to think about the risks and whether you’re okay with them.

Saving is keeping your money safe, like in a piggy bank or a savings account. It’s good for short-term goals. Investing is for the long haul, aiming for bigger growth over years. It’s for goals far in the future, like college or a house.

Learning to Invest

Start by reading books or websites about investment. Talk to adults who invest. Maybe even try a game that simulates investing. Remember, it’s about being patient and making smart choices to help your money grow over time.

500 Words Essay on Investment

Investment is like planting a seed and waiting for it to grow into a tree. It’s when you put your money into something, like a business, property, or shares in a company, hoping that over time, it will become more valuable. Imagine you buy a small toy for $10 and sell it later for $20, that extra $10 is what you gained from your investment.

There are many places where you can invest your money. One common type is stocks, which means you own a small part of a company. If the company does well, so do you; but if it doesn’t, you might not make money. Another type is bonds, which is like lending your money to a company or government, and they pay you back with interest. Real estate is when you buy land or buildings, and it can make money if the property’s value goes up or if you rent it out. Lastly, saving accounts are the safest way to invest, where you put money in the bank and the bank pays you a little bit extra over time.

Why People Invest

People invest for many reasons. Some want to make sure they have enough money for when they get older and stop working. Others might want to save for a big thing in the future, like going to college or buying a house. Investing can also help you make more money than just keeping it in a piggy bank because over time, investments usually grow more than the money you can earn in a savings account.

Investing is not always a sure thing. There’s a chance you could lose money, especially if you need to take your money back quickly or if the place you invested in has problems. But with bigger risks, you could also make more money. It’s like a seesaw: on one side is the chance to make more money, and on the other is the chance of losing money. Smart investors think carefully about how much risk they want to take.

Getting Started with Investing

To start investing, you don’t need a lot of money. You can begin with a small amount and add to it over time. It’s also important to learn as much as you can before you start. Read books, ask family members, or talk to a teacher about how investing works. There are also special accounts for young people that can help you begin safely.

Being Patient is Key

Investing is not about getting rich quickly. It’s about being patient and waiting for your money to grow slowly. Sometimes it can take many years for an investment to pay off. Think of it like a slow race where the goal is to finish, not to be the fastest.

In conclusion, investing is a way to make your money work for you. By understanding the different types of investments, why people invest, and the balance between risk and reward, you can make informed decisions. Remember, it’s important to start small, learn continuously, and be patient. With time and smart choices, investing can help you reach your financial goals.

That’s it! I hope the essay helped you.

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What Is Investing?

Understanding investing, types of investments.

• Investing Styles

How to Invest

A brief history of investing, investing vs. speculation, example of return from investing, how can investing grow my money, the bottom line.

• Investing Basics

Investing Explained: Types of Investments and How to Get Started

Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career.

Investopedia / Sydney Saporito

Investing, broadly, is putting money to work for a period of time in some sort of project or undertaking to generate positive returns (i.e., profits that exceed the amount of the initial investment). It is the act of allocating resources, usually capital (i.e., money), with the expectation of generating an income, profit, or gains.

One can invest in many types of endeavors (either directly or indirectly), such as using money to start a business or in assets such as real estate in hopes of generating rental income and/or reselling it later at a higher price.

Investing also differs from speculation, as evidenced by the investor's timeframe. Speculators are typically looking to gain from short-term price fluctuations that occur in weeks, days, or even minutes. Investors usually consider that a greater period of time, like months or years, is needed to generate acceptable returns.

Key Takeaways

• Investing involves deploying capital (money) toward projects or activities expected to generate a positive return over time.
• The type of returns generated depends on the type of project or asset; real estate can produce both rents and capital gains; many stocks pay quarterly dividends; bonds tend to pay regular interest.
• In investing, risk and return are two sides of the same coin; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk.
• Investors can take the do-it-yourself approach or employ the services of a professional money manager.
• Whether buying a security qualifies as investing or speculation depends on four factors—the amount of risk taken, the holding period, the frequency of the investment activity, and the source of returns.

Investing is to grow one's money over time. The core premise of investing is the expectation of a positive return in the form of income or price appreciation with statistical significance . The spectrum of assets in which one can invest and earn a return is vast.

Risk and return go hand-in-hand in investing; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk. At the low-risk end of the spectrum are basic investments such as Certificates of Deposit (CDs); bonds or fixed-income instruments are higher up on the risk scale, while stocks or equities are regarded as riskier.

Commodities and derivatives are generally considered to be among the riskiest investments. One can also invest in something practical, such as land, real estate, or delicate items, such as fine art and antiques.

Risk and return expectations can vary widely within the same asset class. For example, a blue chip that trades on the New York Stock Exchange will have a very different risk-return profile from a micro-cap that trades on a small exchange.

The returns generated by an asset depend on its type. For instance, many stocks pay quarterly dividends, whereas bonds generally pay interest every quarter. In many jurisdictions, different types of income are taxed at different rates .

In addition to regular income, such as a dividend or interest, price appreciation is an important component of return. Total return from an investment can thus be regarded as the sum of income and capital appreciation.

Standard & Poor's estimates that from 1926 to 2023, dividends have contributed approximately 32% of total return for the S&P 500 while capital gains have contributed 68%. Capital gains are, therefore, an important piece of investing.

Economists view investing and saving to be two sides of the same coin. This is because when you save money by depositing in a bank, the bank then lends that money to individuals or companies that want to borrow that money to put it to good use. Therefore, your savings are often someone else's investment.

Today, investment is mostly associated with financial instruments that allow individuals or businesses to raise and deploy capital to firms. These firms then rake that capital and use it for growth or profit-generating activities.

While the universe of investments is vast, here are the most common types of investments .

A buyer of a company's stock becomes a fractional owner of that company. Owners of a company's stock are known as its shareholders. They can participate in its growth and success through appreciation in the stock price and regular dividends paid out of the company's profits.

Bonds are debt obligations of entities, such as governments, municipalities, and corporations. Buying a bond implies that you hold a share of an entity's debt and are entitled to receive periodic interest payments and the return of the bond's face value when it matures.

Funds are pooled instruments managed by investment managers that enable investors to invest in stocks, bonds, preferred shares, commodities, etc. Two of the most common types of funds are mutual funds and exchange-traded funds (ETFs).

Mutual funds do not trade on an exchange and are valued at the end of the trading day; ETFs trade on stock exchanges and, like stocks, are valued constantly throughout the trading day. Mutual funds and ETFs can either passively track indices, such as the S&P 500 or the Dow Jones Industrial Average, or can be actively managed by fund managers.

Investment Trusts

Trusts are another type of pooled investment. Real Estate Investment Trusts (REITs) are one of the most popular in this category. REITs invest in commercial or residential properties and pay regular distributions to their investors from the rental income received from these properties. REITs trade on stock exchanges and thus offer their investors the advantage of instant liquidity.

Alternative Investments

" Alternative investments " is a catch-all category that includes hedge funds and private equity. Hedge funds are so-called because they can limit (hedge) their investment risks by going long and short on stocks and other investments.

Private equity enables companies to raise capital without going public. Hedge funds and private equity were typically only available to affluent investors deemed " accredited investors " who met certain income and net worth requirements. However, in recent years, alternative investments have been introduced in fund formats accessible to retail investors.

Options and Other Derivatives

Derivatives are financial instruments that derive value from another instrument, such as a stock or index. Options contracts are a popular derivative that gives the buyer the right but not the obligation to buy or sell a security at a fixed price within a specific period. Derivatives usually employ leverage , making them a high-risk, high-reward proposition.

Commodities

Commodities include metals, oil, grain, animal products, financial instruments, and currencies. They can either be traded through commodity futures—agreements to buy or sell a specific quantity of a commodity at a specified price on a particular future date—or ETFs. Commodities can be used for hedging risk or speculative purposes.

Comparing Investing Styles

Let's compare a couple of the most common investing styles:

• Active vs. passive investing : The goal of active investing is to "beat the index" by actively managing the investment portfolio. Passive investing, on the other hand , advocates a passive approach, such as buying an index fund, in tacit recognition of the fact that it is difficult to beat the market consistently. While there are pros and cons to both approaches, in reality, few fund managers beat their benchmarks consistently enough to justify the higher costs of active management.
• Growth vs. value : Growth investors prefer to invest in companies in their growth stages, which typically have higher valuation ratios than value companies. Value investors look for companies that are undervalued by the market that meet their more strict investing criteria.

Do-It-Yourself Investing

The question of " how to invest " boils down to whether you are a do-it-yourself (DIY) kind of investor or would prefer to have your money managed by a professional. Many investors who prefer to manage their money themselves have accounts at discount or online brokerages because of their low commissions and the ease of executing trades on their platforms.

DIY investing is sometimes called self-directed investing, and requires a fair amount of education, skill, time commitment, and the ability to control one's emotions. If these attributes do not describe you well, it may be smarter to let a professional help manage your investments.

Professionally-Managed Investing

Investors who prefer professional money management generally have wealth managers looking after their investments. Wealth managers usually charge their clients a percentage of assets under management (AUM) as their fees.

While professional money management is more expensive than managing money by oneself, such investors don't mind paying for the convenience of delegating research, investment decision-making, and trading to an expert.

The SEC's Office of Investor Education and Advocacy urges investors to confirm that their investment professional is licensed and registered.

Robo-Advisor Investing

Some investors opt to invest based on suggestions from automated financial advisors. Powered by algorithms and artificial intelligence, robo-advisors gather critical information about the investor and their risk profile to make suitable recommendations.

With little to no human interference, robo-advisors offer a cost-effective way of investing with services similar to what a human investment advisor provides. With advancements in technology, robo-advisors are capable of more than selecting investments. They can also help people develop retirement plans and manage trusts and other retirement accounts, such as 401(k)s.

While the concept of investing has been around for millennia, investing in its present form can find its roots in the period between the 17th and 18th centuries when the development of the first public markets connected investors with investment opportunities. The Amsterdam Stock Exchange was established in 1602, and the New York Stock Exchange (NYSE) in 1792.

Industrial Revolution Investing

The First Industrial Revolution (1760-1840) and the Second (late 19th century and early 20th century) resulted in greater prosperity, as a result of which people amassed savings that could be invested, fostering the development of an advanced banking system. Most of the established banks that dominate the investing world began in the 1800s, including Goldman Sachs and J.P. Morgan.

20th Century Investing

The 20th century saw new ground being broken in investment theory, with the development of new concepts in asset pricing, portfolio theory , and risk management. In the second half of the 20th century, many new investment vehicles were introduced, including hedge funds, private equity, venture capital, REITs, and ETFs.

In the 1990s, the rapid spread of the Internet made online trading and research capabilities accessible to the general public, completing the democratization of investing that had commenced more than a century ago.

21st Century Investing

The bursting of the dotcom bubble—a bubble that created a new generation of millionaires from investments in technology-driven and online business stocks—ushered in the 21st century and perhaps set the scene for what was to come.

In 2001, the collapse of Enron took center stage, with its full display of fraud that bankrupted the company and its accounting firm, Arthur Andersen, as well as many of its investors.

One of the most notable events in the 21st century, or history for that matter, is the Great Recession (2007-2009) when an overwhelming number of failed investments in mortgage-backed securities crippled economies around the world. Well-known banks and investment firms went under, foreclosures surmounted, and the wealth gap widened.

The 21st century also opened the investing world to newcomers and unconventional investors by saturating the market with discount online investment companies and free-trading apps, such as Robinhood.

There is no clear definition separating investing from speculation used for legal or regulatory means. All forms of investment incur risk and include a speculative hope that the investment will pay off. Because the outcome is uncertain, there is little to distinguish between the two activities. However, some generalities do apply when attempting to categorize these activities:

• The amount of returns sought : Speculators often seek an extreme degree of return, where investors may be content with a less flashy payout.
• The holding period of the investment : Investing typically involves a longer holding period, measured quite frequently in months or years; speculation usually involves less than a few months, although some speculators are content to wait years for their bets to pay off.
• The frequency of investments : Investments can be initiated more frequently if the holding period is shorter. Speculators tend to have a higher frequency of investment decisions than investors when comparing within a common timeframe.
• Source of returns : Price fluctuation is the exclusive source of return for speculators. Investors may be able to gain income through dividends, coupons, or other interest payments, though they certainly hope to gain from price appreciation as well.

Price volatility is often considered a common measure of risk, but a comparatively lower investment size can offset price volatility. So, although blue-chip, dividend-paying stocks may seem much less risky than small-cap growth stocks or  cryptocurrency  investments, the risk may actually have more to do with the comparative risk taken on by the individual investor.

Proper risk management has more to do with the position size of one's investment than the total investment capital. The amount of risk in an investing strategy is also influenced by the frequency with which an investor takes on risk in an individual investment. Speculators tend to have a higher frequency of initiating risk. Thus, speculation is considered more risky.

Assume you purchased 100 shares of XYZ stock for $310 per share ($31,000) and sold it exactly a year later for $46,020. What was your approximate total return, ignoring commissions? Keep in mind, XYZ does not issue stock dividends. The resulting capital gain would be [ ( $46,020 - $31,000 ) / $31,000 ] x 100 = 48.5%.

Now, imagine that XYZ had issued dividends during your holding period, and you received $5 in dividends per share. Your approximate total return would then be 50.06%:

• $46,020 + $500 = $46,520
• [ ( $46,520 - $31,000 ) / $31,000 ] x 100 = 50.06%

Investing is not reserved for the wealthy. You can invest nominal amounts. For example, you can purchase low-priced stocks, deposit small amounts into an interest-bearing savings account, or save until you accumulate a target investment amount.

If your employer offers a retirement plan, such as a 401(k), allocate small amounts from your pay until you can increase your investment. If your employer participates in matching, you may realize that your investment has doubled.

You can begin investing in stocks, bonds, and mutual funds or even open an IRA. Starting with $1,000 is nothing to sneeze at. A $1,000 investment in Amazon's IPO in 1997 would yield millions today.

This was mainly due to several stock splits, but it does not change the result: monumental returns. Savings accounts are available at most financial institutions and don't usually require a large amount to invest. Savings accounts don't typically boast high interest rates, so shop around to find one with the best features and most competitive rates.

Believe it or not, you can invest in real estate with $1,000. You may not be able to buy an income-producing property, but you can invest in a company that does. A real estate investment trust (REIT) is a company that invests in and manages real estate to drive profits and produce income. With $1,000, you can invest in REIT stocks, mutual funds, or exchange-traded funds.

How Can I Start Investing?

You can choose the do-it-yourself route, selecting investments based on your investing style, or enlist the help of an investment professional, such as an advisor or broker. Before investing, it's important to determine your preferences and risk tolerance. If you're risk-averse, choosing stocks and options may not be the best choice.

Develop a strategy outlining how much to invest, how often to invest, and what to invest in based on goals and preferences. Before allocating your resources, research the target investment to make sure it aligns with your strategy and has the potential to deliver the desired results. Remember, you don't need a lot of money to begin, and you can modify as your needs change.

What Are Some Types of Investments?

There are many types of investments to choose from. Perhaps the most common are stocks, bonds, and ETFs/mutual funds. Other types of investments to consider are real estate, CDs, annuities, cryptocurrencies, commodities, collectibles, and precious metals.

Is Investing the Same As Gambling?

Investing and gambling are similar in one aspect: the variability of chance. However, these activities differ in how they are designed, approached, and regulated. Gambling is confined to what can happen within a given event. In some cases, the game's rules are dictated by a person or entity that offers the game, and the rules can be constructed to benefit them over time.

Investing differs from gambling because the regulators—government and industry entities—only regulate the markets. As such, their incentive is to create a fair and orderly playing field rather than to try and profit.

Investing is the act of distributing resources into something to generate income or gain profits. The type of investment you choose might likely depend on what you seek to gain and how sensitive you are to risk.

Assuming little risk generally yields lower returns, and assuming high risk typically yields higher returns. Investments can be made in stocks, bonds, real estate, precious metals, and more. You can invest with money, assets, cryptocurrency, or other mediums of exchange.

There are different types of investment vehicles, such as stocks, bonds, mutual funds, and real estate, each carrying different levels of risks and rewards.

Investors can independently invest without the help of an investment professional or enlist the services of a licensed and registered investment advisor. Technology has also afforded investors the option of receiving automated investment solutions by way of robo-advisors.

S&P Dow Jones Indices. " S&P 500 Dividend Aristocrats: The Importance of Stable Dividend Income ."

U.S. Securities and Exchange Commission. " Tips for World Investor Week 2020: Investor Bulletin ."

NYSE. " The History of NYSE ."

AMSA. " History of the World's Oldest Stock Exchange ."

Britannica. " Industrial Revolution ."

Aalto Investment Club. " 20th Century & Investing Theories ."

Britannica. " Enron Scandal ."

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