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What is an Investment?

June 1, 2023

Investing is one way to grow your wealth and make your money work for you.

By putting a certain amount of funds into something, like a business, stock, or product, that initial investment amount can grow into much more. 

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Investment Definition

What is an investment? Investing is the process of when you spend money in an effort to grow that money.

An investment is whatever you decide to spend your money on to achieve this goal of monetary growth. 

Investments are also financial assets and resources. When you have financial assets, you have financial resources you can lean on in case of emergencies.

For example, if you invest in a property, then you can later sell that property for more money, or to get a large amount to help you through financial difficulty or need. 

Return on Investment Definition

How to calculate Return on Investment

What is a return on investment? A return on investment is a calculation that helps show you how profitable the investment was. It is often referred to in shorthand as simply the "ROI."

When looking into an investment, it's a good idea to always calculate ROI first.

That way you can determine just how much money you can earn through this investment. 

ROI = (Value of the Investment – Cost of Investment) / Cost of Investment

ROI = (Net ROI / Cost of Investment) x 100% 

If you don't figure out ROI before putting money into an investment, then you run the risk of losing more money than you make. 

Foreign Direct Investment Definition

A foreign direct investment (FDI) is when a company invests in another company from another country.

For instance, American Company A decides to invest in Australian Company B or vice versa. 

The most common form of foreign direct investments is when a company establishes some kind of official business relations or partial ownership in another country. FDIs might also include business trades in technology or provisions and not just capital. 

Capital Investment Definition

Capital investments are when companies seek out capital investments to help fund the business. 

Capital investments might also include when a company invests in assets like real estate.

This also helps add to a company's funds and assets to help fund the company's current and future expenses. 

Investment Banking Definition

Investment banking is a particular kind of banking. It is a branch of banking that specializes in all things related to investments. 

This means investment banking includes things like creating investments, setting up investment accounts, underwriting investments, debts, loans, and stocks. 

There has to be a finance sector that specifically handles all the paperwork, legalities, and logistics of investments and that's what investment banking does. 

Portfolio Investment Definition

Portfolio investment is when an investor brings together one or more investments.

Portfolio investments are how an investor can build a diverse financial portfolio of stock ownership, bonds, and other financial assets and resources for the future. 

An example of a portfolio investment might be an investor who is the landlord owner of some rental housing and has bought some stocks in a successful company.

Having these two items in their investment portfolio can give them profit and help grow their wealth. 

Bond Investment Definition

Bond investments can also be called fixed-income investments. A bond is a type of IOU between loan lenders and loan borrowers.

Bonds are usually used by the government or corporations when they need loans to finance their projects and operations. 

When you invest in bonds, you become the lender of the loan or the owner of the bond. That means the borrower repays their loan through repaying you. 

Equity Investment Definition

Equity investments refer to investments made in a company's profits, like shares, bonds, and stocks.

You are investing in a portion of a company's value, also known as equity. 

Investment Property Definition

Investment property refers to real estate you purchase as an investment.

You might use your property investment to build rental housing, or you might renovate or build a home on the property to sell for a profit. 

Investment Risk Definition

Investment risk is how a measurement of how likely investment is to succeed or not. Investment risk will weigh the pros and cons to figure out whether a specific investment opportunity is worthwhile or not.

Investment risk also compares the return on investment (or the estimated potential profits) with the possible losses. 

Investment risk assessments are all about calculating whether the benefits of an investment outweigh the risks involved. 

A paper with numerous graphs next to a computer and a mobile phone.

Investment Calculator

There are many investment calculators you can find and use for free online. An investment calculator lets you input the starting amount, how long you want to watch your investment grow, the return rate or interest percentage it should build, and any additional contributions that might get put into the investment over time.

For example, some investments aren't one-time investments. some investments require you put money into them more than once, like once a month or once a year.

With all this information you can then calculate how much you will profit off of this investment in the end. 

The Dave Ramsey Investment Calculator

With Dave Ramsey's online investment calculator you can calculate retirement savings to help you successfully plan for retirement. Retirement is one of the biggest things you can invest in during your life.

Basically, an investment calculator is trying to help you figure out the return on investment or the ROI. 

Simple Interest

What is simple interest?

Simple interest is interest set on the principal amount.

Simple interest is also one interest rate set on a loan or investment. 

Compound Interest

What is compound interest? Compound interest is interest on interest.

This is different from simple that is only applied to the initial investment amount. 

Compound interest, on the other hand, is interest that is applied to the principal amount and again later as the fund grows. 

Investment Bonds

There are two different kinds of investment bonds. Coupon bonds and zero-coupon bonds. A coupon refers to the intervals in which the borrower needs to repay the loan.

A zero-coupon bond means that the bond's interest and principal amount are both paid at the end, rather than in intervals. 

Consider investing in bonds to diversify your financial portfolio.

It never hurts to have several different kinds of investments in your financial arsenal. 

Dividend Investing

Some shareholders of a company prefer to take out a portion of their stock on a regular basis. They use the stocks they hold to receive income every so often. 

Dividend stocks let stockholders share in a company's profits now, rather than waiting for the right moment to sell your stocks for a profit.

The stockholder also gets to keep the stocks they own, instead of losing ownership of your shares by selling them. 

This makes dividend investing perfect for anyone looking for a passive form of regular income. This type of investing also benefits the company because they can then reinvest any remaining profits back into their business. 

One thing to keep in mind when investing in dividend stocks is that your dividend payments get taxed twice.

Once before you receive the payment when the company has to pay taxes on their earnings, and again when you receive the payment. 

Another risk with dividend investments is that if a company falls on hard times, it might have to cut its dividends. 

CD Investment

What is a CD? CD stands for Certification of Deposit. It is a type of investment account.

You purchase a CD account and then that money is locked away for a certain amount of time to grow through high-interest rates. 

CDs are similar to savings accounts except you can't withdraw funds during the term of the CD. Not unless you are willing to pay an early withdrawal penalty.

This might be anywhere between a few months to a few years. 

CDs also have much higher interest rates than a typical savings account offers. They also often require a higher minimum balance or initial amount. 

You can find CD accounts available at your local bank or credit union. CDs are also one of the safest forms of investing.

Your money isn't being put at risk at all but is still being allowed to grow through interest much faster than it would in a regular savings account. 

Investing Account

Standard Brokerage Accounts can also be referred to as taxable brokerage accounts or nonretirement accounts. They are open to holding many investment types, like stocks, mutual funds, bonds, and ETFs. 

Retirement Accounts are financial accounts designed to hold, grow, and later distribute funds for retirement years. There are many different kinds of retirement accounts like IRAs and 401ks. 

Each retirement account type has different features for how they hold your retirement savings, how they let them grow, how they distribute them back to you when you do retire, and how they are or aren't taxed. 

For instance, some retirement accounts get taxed when you put money in them and others get taxed as you take money out of them. 

Impact Investing

What is impact investing? Impact investing is when investing is done to grow financially and cause some kind of positive impact as well. 

Impact investing might be a nonprofit that helps the community, or investing in healthy and conscious products like clean technology or environmentally friendly. 

How to Invest in Stocks

Step 1: Make an Investment Budget

When investing in stocks, you first need to figure out your investing plans, goals, and budget. What do you want your investment portfolio to achieve? 

Investing can serve a lot of purposes. It can help you save for a big purchase like a house, education, or retirement.

It can also help you grow your wealth, earn extra income, or grow your business. 

Every investor has different goals in mind for their investments. Be sure to know what your long and short-term goals might be for your investments.

Then, make a careful investment plan and budget with these goals and investment intentions in mind. 

Step 2: Open an Investment Account 

To open an investment account you'll need to provide your name, date of birth, address, social security number, and potentially your bank name and account number. Unless you are setting up an investment account with your bank. 

There are brokers you can create investment accounts with who can help manage your investments in varying degrees. 

Step 3: Choose Stocks to Invest In 

It's smart to choose several different kinds of investments in order to have a diverse financial portfolio. 

An iPad with stocks on the screen.

How to Invest Money

Investment opportunities are everywhere if you only know where to find them.

There are many ways to make your money work for you and grow your personal wealth and expand your financial portfolio and resources. 

  1. Stocks 
  2. Money Lending
  3. Certificate of Deposits (CDs) 
  4. Real Estate

1. Stocks 

You can invest your money by buying stocks. Buying stocks gets you shares in a company.

As that company does well, your initial investment grows. 

2. Money Lending

Lend money to others and charge interest so you make a profit by the time they finish paying back the loan.

Lending money comes with risks, but you can mitigate these risks when you lend money to people and businesses you know you can trust.

You can also lend money to the government by buying bonds. 

3. Certificate of Deposits (CDs) 

CDs are the most secure form of investment you can make. CDs aren't subject to risks and market changes the way other investments are. 

They also don't depend on things like how successful the business is, or how well the economy is doing, or how well the real estate market is doing for investors right now. 

CDs are a simple and straightforward way to put some of your money away for a while and let it grow. 

4. Real Estate

Investing in real estate properties is another really popular way to put your money to work. You can invest in real estate in several ways too. 

You can own properties and rent them out to residents. You could buy, fix, and sell homes. Or you could take part in a Real Estate Investment Trust (REIT). 

A REIT is a money pool that investors can take part in together. Rather than taking on the risks of real estate investing on your own, you can invest in a REIT account. 

How to Invest in Mutual Funds

First of all, what are mutual funds? Mutual funds are some of the most popular forms of investing, especially for beginner investors.

There are also two different kinds of mutual funds, passive and active. 

But this just refers to how mutual funds are handled.

Active management means that you are paying for investment management services.

Passive management means that you are managing your investments on your own. 

This makes active mutual funds more expensive because you are paying management fees, but you also won't have to bear the burden of managing investments all on your own. 

Step 1: Budget for Mutual Fund Investments

Investments are usually long-term financial goals. Keep this in mind when you sit down to make long-term plans for your mutual fund investment.

Think about what you want to get out of this investment and how you want to go about achieving this goal. 

Mutual fund accounts usually require a minimum amount to be put into the account when you first open it.

This amount varies depending on the place, but you can expect to make an initial deposit anywhere from $500 to $3,000. 

Step 2: Pick an account

When making your plans you'll also need to figure out where you want to buy your mutual funds. Research different brokers and weigh their fees and services with each other. 

Step 3: Continue to Manage Your Investments 

It's important to stay on top of your investments. You should try and rebalance your portfolio at least once a year.

Think of this as rebalancing your checkbook or your budget. You might do it less often but it's just as important. 

Investment Management

Proper investment management is very important. In order to reach your investment goals, you'll have to manage your investments wisely, purposefully, and responsibly. 

Investment management is especially helpful if you have multiple investments and financial assets to keep track of. 

Investment management can be done by yourself or by hiring professionals.

Investment management might include handling sources of income, financial assets, and resources, investments, buying and selling of stocks and other investments, planning short and long-term goals for your finances, managing your bank accounts and other accounts, budgets, and even your taxes. 

Best Investments

When researching which stocks to buy there are a few key factors you should look for, like risk factor, volatility, and time horizon. 

Volatility has to do with how much a stock or investment is expected to fluctuate in market price.

A stock with higher volatility will fluctuate up and down in price more while a stock with lower volatility will have a steadier price. 

Risk factor is a combined assessment of an investment's interest rate, exchange rates, commodity, volatility, and stock prices.

Most investments come with a degree of the financial risk involved but some investments have higher risks than others. 

Time horizon can also be called a planning horizon.

This is a planned time period for when the investor plans to end this investment. 

A time horizon is helpful because then financial planners can weigh how profitable an investment might be in a given time frame compared to other investment options. 

Investments come in many forms, but the following are some of the best investment types you could choose from:

  • Savings accounts with high-yield interest rates
  • Certificates of Deposit (CD) accounts
  • Money market accounts 
  • Bond funds 
  • Small businesses, entrepreneurs
  • Nonprofit organizations
  • Stocks  
  • Dividend stocks 
  • Index funds 
  • Real estate, properties, rental housing

Investing in Real Estate

There are many ways to invest in real estate.

You could become a landlord, flip homes for a profit, or join a real estate investment group (REIG), a real estate investment trust (REIT), or an online real estate investment platform. 

Investing in real estate comes with many risks, but also has the potential of providing a steady stream of income through renting, or big payouts when a home you've fixed sells for big profits. 

A brown home with a sunset behind it.

Invest in Startups

Startups can be another risky business to invest in because you don't know what startups will succeed and fail. But with some professional advice, it can be easier to guess which startups will make smart investments. 

Investing in startups is also a great way to get involved in a kind of impact investing because you'll be supporting small businesses. 

There are also safer ways now to invest in startups through organizations like SeedInvest, WeFunder, and FundersClub.

These are like investment groups you can join that control the investments and you just participate. 

Gold as an Investment

Gold is another investment you could go with! Gold has been valuable for a very long time. It's a malleable metal that is easy to work with and has a beautiful luster that makes people want to use it to make things like jewelry.

Gold is also difficult to obtain which also increases its value. 

Monitor the current value of gold on the World Gold Council website. You can invest in gold primarily by either obtaining gold or investing in stocks that are gold-related. 

Gold is also considered a highly volatile investment since the market price of gold can fluctuate dramatically at times. 

That's why many professionals advise that investors only make gold 10% of their finance portfolio, at the most. Here are some examples of ways to invest in gold: 

  • Jewelry 
  • Bars 
  • Coins 
  • Bullion
  • Gold certificates 
  • Perth Mint certificates 
  • ETFs 
  • SPDR shares in gold 
  • Gold mining stocks 
  • Streaming and royalty companies

In Conclusion, 

Investing is a key component to any strong financial portfolio. Investments are how you can make your money work for you. It's how you can plant funds and watch them grow. 

There are also many different ways to invest with plenty of safer, low-risk investment options to choose from.

In the very least, you can always invest in a savings account, retirement account, or CD that can help your money safely and securely grow into greater amounts of wealth.