The word “investing” or “investment” is strange to most young people. You may think that investment is only for adults, however, this is not true. As long as you are old enough to earn money, you are old enough to make investments. Hence, you need to learn the basics of investment as early as possible so you can make your money work for you. Here, you will learn everything you need to know about the abc of investment and the different ways you can invest wisely.
What is Investment?
Investing is simply the act of allocating money, to generate a profit or an income. Basically, when you invest, you put money to increase the value of the money i.e. over some time, you have gained more money than the amount you put in initially. In other words, investing means putting your money to earn more money.
What are the main components of investing?
Although there are questions you need to ask before investing, equally as important, there are three major components of investing you should know. They include:
1. Stocks
Stocks are a representation of the ownership of a company. Basically, the owners of stock are entitled to earn dividends, which are given out as earnings. Also, owners of stock can vote on the nomination of directors and other critical matters concerning the company. People invest in stocks with the hopes that the value of their investment will certainly increase over the long term.
2. Bonds
Bonds are more like a loan you make to a government or corporation or a government. The borrower, usually called an issuer, promises to pay you back the amount of the loan after some time. Depending on the kind of bond you purchase, the borrower may pay you periodically or all at once whenever your bond reaches maturity.
3. Cash Equivalents
Short-term investments with maturities dates of less than a year are called cash equivalents. Basically, this includes investing in short-term corporate or government securities as well as money market funds or certificates of deposit. These types of investments tend to carry very little risk, hence, they provide the lowest returns.
Some other ways you can invest your money include:
4. Investing in assets that increase in value
Basically, this involves buying something that increases in value, such as gold or property. After a few years, when the value has appreciated, you then sell the asset at a much higher price.
5. Investing money for someone else’s use
You lend your money to a person who is in need and the person pays back your money with interest after a certain period.
What investing is NOT
Here are the two things that should not be considered as investing:
1. Saving is not investing
Investing involves you actively trying to grow your money. On the other hand, putting money in your bank account is saving, not investing.
2. Investing is NOT betting
Every investment carries a degree of risk. However, betting is not the same as investing. You do not put your money into anything random and call it an investment. Moreover, true investing is a well-thought process that neither depends on luck nor good fortune to earn returns.
Why should you invest?
You need to invest so that your money can grow. If you just save your money in a bank account, it will never grow. However, investing your money helps you to multiply it by receiving dividends or interest on your investment. Also, investing helps you to achieve your financial goals and will cover your needs after retirement. However, be wary of investment scams.
Conclusion
Learning about the abc of investment is not a difficult task. Basically, you just need to learn about the different components of investment and diversify your portfolio based on this knowledge. You can learn all you should know about investment above and this knowledge will guide you through the process. Do not forget that all investments come with risks so you should be prepared for any risk that may come your way.
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