Investing is a hot topic in many financial news articles. It is also a common way of making your money work for you. According to a study by Gallup, in 2021, over fifty percent of Americans invested their money in the stock market. And this is just one of the ways to capitalize on investing.
For many people, however, investments remain uncharted territory. Read this GBC article to get a general understanding of the topic and to know how to invest money to grow your capital.
What is investing?
In simple words, investing means putting your resources (money or other assets) towards something to turn a profit, gain an income, or for another benefit. When you invest money, you purchase assets that you expect to grow value over time.
It is important to bear in mind that investing is always attached to some level of risk. The riskier your investment, the higher your profit is, and vice versa.
How does investing work?
Unlike saving money, which simply means putting your funds away to achieve some short-term goals, investing is more of a long-term strategy. It is created specifically to make a sizable profit from your money. There are three most common ways of investing – appreciation, capital gain, and income generation.
Appreciation
According to Forbes magazine, appreciation is when you wait for the value of an investment to grow between the time you buy and sell it. Different asserts can appreciate for several reasons:
- A stock share grows in value when a company launches a new trading product;
- A corporate bond appreciates when the same company releases a new bond with a lower interest ratio;
- The value of a commodity can increase because a currency decreases in value;
- Real estate can grow its value due to the renovation of the property or improvements in the neighborhood.
Capital gain
Trading assets for profit, or realizing a capital gain, is the second most common way of investing. It works when you buy an asset at a low price and then sell it at a higher value.
To profit from a capital gain, investors either work directly with brokers or hire a brokerage firm.
Income investing
When you buy and hold an asset that generates a cash flow over time, it is called income investing. Most of the company stock shares pay dividends. So, some investors hold these equities and collect dividend profit.
Main types of investments
There are numerous types of investments with different levels of risk attached. The most common and less risky forms of investing are bonds, certificates of deposit, EFTs, and real estate. At the high-risk end are stocks, commodities, options, and digital currencies.
| Low-risk investment | High-risk investment |
| Bonds | Stocks |
| EFTs | Commodities |
| Real estate | Options |
| Certificates of deposit | Cryptocurrencies |
Stocks
Stocks are the most well-known and simple form of investment. Publicly traded companies – including industry giants like Google, Facebook, or Apple – sell ownership stakes to raise money for their business operation. When you invest in these equities, you become a partial owner of a company and can partake in its gains and losses.
As mentioned before, some companies also pay stock owners dividends – small regular payments of their profits. Purchasing a company’s equity, however, doesn’t guarantee any return. Moreover, you can even lose money when a stock value goes down. For these reasons, stocks are regarded as high-risk investments.
Bonds
The debt obligations of organizations are called bonds. So, when you invest in a bond, you are essentially loaning money to a business (corporate bonds) or government (municipal bonds) institution for a set period. You are also entitled to regular interest payments. And after an entity matures, you get investment back.
As the entity guarantees fixed payments, buying bonds is less risky than investing in the stock market. It is also called a fixed-income investment. It is important to check the credit history of a firm before purchasing its bonds, as companies with low credit scores can go bankrupt overnight. Profits from bonds, however, are typically lower than from company stakes.
Certificates of deposits (CDs)
Another type of low-risk investment is certificates of deposit. When you invest in CD, you give money to a bank for a set period, which lasts from six months to several years. After that time is over, you receive the full amount of the deposit plus interest. The longer is the duration of the certificate, the higher your benefit. Purchasing CDs is a great investment if you want to reach a long-term target, as early withdrawals come with hefty penalties. Typically, the certificates are also insured up to $250k by FDIC.
Commodities
Commodities are material products you can purchase as an investment. The most common types of commodities for investing are:
- Agricultural products – wheat, soy, and corn;
- Industrial and precious and metals – gold, silver, and copper;
- Energy products – oil, natural gas, and petroleum;
- Financial instruments and currencies.
Investors use these assets to hedge risks during inflation or to speculate. Most of them trade commodities as futures contracts, EFTS, or directly as stocks and mutual funds instead of buying physical products. Commodities are risky investments as the value of these products depends greatly on the market demand.
Real estate
Investing your money in real estate is another way to turn a profit. Here are the two most common ways to do so:
- Buying a property with an expectation that its value will go up over time;
- Getting shares of a real estate investment trust– an entity that profits from real estate. REITs usually pay high dividends.
Although it isn’t generally considered a risky investment, the odds of capitalizing on real estate depends on a number of factors, such as:
- global economic situation;
- state of the housing market;
- crime rates in the neighborhood;
- public education rates;
- stability of the local governments.
Mutual funds and exchange-traded funds (EFTs)
When you invest in mutual funds and EFTs, you are buying hundreds of thousands of assets – stocks, bonds, real estate, and commodities – united by a certain principle. Investors usually get these funds to diversify their portfolios and avoid the risks of losing their money.
While very similar, mutual and exchange-traded funds have a few differences:
- Mutual funds are usually run by professionals and have a minimum investment limit of a few thousand dollars;
- EFTs are ideal for beginners in investing and can be purchased for a cost of one share or less. These funds, however, aren’t actively managed and just copy the performance of benchmark indexes.
Options
Buying options is a more complex and high-risk method of investing. When you purchase an option, you get the right to trade it at a set price at a specific time. There are two types of options:
- Call – for purchasing assets;
- Put – for selling assets.
Options aren’t for novices, as they bear the high risk (but also can bring high returns).
Cryptocurrencies
Cryptocurrencies are one of the newest investing methods. One of the benefits of this asset is that it can be traded directly on the online ledgers without brokers. Digital currencies, however, are highly volatile and are not backed by any real assets or government officials. That’s why investments in cryptocurrencies are very risky.
How to invest money: five steps to success
If you’ve decided to invest your money, do some research first. You have to educate yourself on the investment basics, improve your financial literacy, understand your options, and weigh the risks. Of course, every situation is unique. But in this article, we’ve laid down some essential points of the investment process.
Step one: decide how much you can invest
The first step to investing is deciding how much money you are willing to put into it. Evaluate your current financial situation, sources of income, and costs. Financial experts strongly advise against investing if you have any debt or don’t have an emergency fund. Keep in mind that you have to invest regularly, as it is a rather long-term strategy for profit.
The good thing is that you can invest even with small sums of money. You don’t need to pay a minimum fee to sign up with most online brokers, and some stocks and EFTs cost just a couple of dollars.
Step two: identify your goals
The next thing to do is to outline your financial goals. Decide what you want to achieve from a short and long-term perspective. It is also important to establish clear and pragmatic timeframes for each target.
Step three: decide where to invest
Evaluating your investment options is the next part of the process. You need to understand how much risk you are ready to take before picking an asset to invest in. Riskier investments, like stocks and options, are recommended for far-off objectives. Financial advisors also encourage you to diversify your investment portfolio to lower the risks and achieve better results.
Step four: pick your investing style
As an investor, you also have to choose your style of doing things. The two most common approaches to investment are:
- Active, when you actively manage your portfolio and closely monitor the market;
- Passive that doesn’t require that level of commitment and allows the market to run its course.
Numerous studies on the subject show that active style requires more costs and also proves to be less efficient in the long run.
Step five: start investing
The final step is to open an account and start actually investing. Depending on your financial capacity, you can choose the following options:
- Do it yourself and set up an online brokerage account. This method is best suited for those who want to create their portfolio and don’t mind doing research. Some brokerage platforms also have low commissions for those on a budget.
- Get help from a financial advisor. Although it is the most expensive option, consulting with a qualified advisor helps make better investment choices and eliminate risks.
- Take advantage of a Robo-advisor – an automatic investing account powered by AI that makes investment suggestions based on your tolerance to, financial targets, and other valuable data. It is a cost-efficient alternative to a human advisor that manages your portfolio.
All of these methods have their pros and cons. So, you need to evaluate your needs before picking the most suitable option.
When is the best time to start investing?
Financial experts agree that investing in your early years yields more potential profits. Firstly, when you are putting money into investments for a long period of time, you can benefit from the fluctuations of the market. Over time, you adjust your strategy to the ups and downs of the market. This, however, only works if you invest regularly. The other advantage of early investments is compounding interest, which is when you earn from the money generated by your investment. Also, when you are younger, you can run a higher risk and have more time to recover. The older you get, the more conservative your approach to investing has to become.
So, it is ideal to start investing in your twenties or early thirties. But as there is no guarantee for any investment, people in their forties, fifties, and even sixties shouldn’t overlook investing as a valuable source of profit.
Why are investments important?
When you are just saving up your fund, you are likely to experience some losses due to inflation is inevitable. Investing, on the other hand, helps ensure financial stability and wellness over the years. For many people, investment is a way of fulfilling their ambitions, such as:
- saving money for retirement;
- generating college funds for their children;
- buying a property;
- funding other goals.
Some people see investing as a way to build wealth or simply reduce taxes.
No matter what your goals are, investing is a smart way of allocating your resources. But remember to consider the risks.
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