Investing Basics

Investing+Basics

Erik Aho

Investing – What is investing? And why is it so important? Let’s start with the definition. To put it simply, investing is the art of turning money into more money. You spend money on something with the hopes that it will be worth more when you sell it. There are so many different types of investing, but the goal is always the same– have your money give you more money. This is concept is called a return, commonly referred to an ROI– a return on investment. With almost all investments, there is risk. In investing terms, risk is defined as the probability of losing money. 

Money, Coin, Investment, Business

Inflation- Why should you invest your money? Why not just hold it in cash? One reason is to protect your money from inflation. The United States Dollar (USD) is not finite, because we print more and more money every day. The more money printed, the more each individual dollar loses it’s value. This process is called inflation. Over the past 107 years, inflation has increased a little over 3% every year. So, if your investments aren’t growing at a quicker rate than inflation, it might not look like it, but you are actually losing the value of your money. Protecting your money from inflation isn’t the only reason to invest. You can also use investing as a way of growing your wealth.

Four Different Types of Investments

Real Estate – Here are a few common investments. One you might be familiar with is real estate. Your house is an investment! It will most likely grow in value over time. According to Black Knight INC, data analysis, houses in America appreciate on average 3.9% every year. There are of course market fluctuations, but this is just an average over the long term. There is a risk, however. Maybe the neighborhood is getting more dangerous, or the local schools aren’t that good anymore, or taxes are raised, etc. All of these things would make the house less attractive to buyers, causing the house to lose value.

Architecture, Building, Driveway, Garage

Bonds- Another investment is bonds. Bonds are when governments or corporations need to raise money for something, so they borrow money from investors. The investors give the initial loan to the institution and they get that money back in a certain amount of years. For argument’s sake, let’s suppose a ten year loan. And because you let them use your money, they pay you interest every year, maybe 5%. At the end of the 10 years, the bond issuer pays back the investors money that they borrowed. This is called bond maturity. Bonds can then be traded to other investors. A risk with bonds is that the institution who issued the bonds might not be able to pay back the investors original investment. 

Precious Metals – Gold, silver, and platinum have always been a common investment. The people who invest in precious metals think that because there is a finite amount of metals on planet Earth, and there are many uses for them, it will always be worth something. In theory, precious metals is a way to hedge your money against inflation. But you have to remember with investing, something is only worth what someone will pay for it. If you own something and you think it’s cool and valuable, that’s great. But it will only be cool and valuable if someone agrees with you, and will pay a high price for it. 

Gold, Ingots, Treasure, Bullion

Stocks – The last investment I’d like to talk about is stocks, or equity investments. Why are they called equities? They are called this because you are literally paying to own equity in a company. When a company wants to raise money to pay for business expenses, they can sometimes go “public.” By taking their company public, they offer equity in the company to investors in the form of stock shares. These stocks are traded on stock exchanges for the most part. The most commonly known are the New York Stock Exchange, and the NasDaq. There are two main ways to make money with stocks: dividends and share price growth. Dividends are regular payments given from the company to the shareholders for each share they own. Dividends are given out to shareholders as a reward for holding their stock. It makes a stock more attractive to investors. The second way to make money is selling the stock for more than you paid for it. Share price is fluctuating all the time. So if you sell it for less than what you paid for it, you actually take a loss of money. That is the main risk. Understanding completely how stocks work is pretty complicated, but in my next article, I’ll talk about how it can be simplified, and how to make money in the stock market!

Entrepreneur, Idea, Competence, Vision