Learn more about what is investing and how to invest responsibly so you can start growing your financial portfolio today.
What is investing and how can you get started? Investing can be a great way to gain passive income and grow your personal wealth. But investing can be tricky and intimidating to anyone who is unfamiliar with how it works. To understand the answer to what is investing, we first need to learn basic investing 101.
What is Investing?
So what is investing anyway? You can't start investing if you don't have a clear understanding of what investing is. So let's start with learning the investing definition first before we dive into investment strategy and how to get started.
The simple answer to what is investing is that it is any financial action taken with the intent to grow wealth. A typical investment includes giving funds with the intent to see larger returns on those initial funds later.
A very common type of investment is stocks or shares. Buying stocks in a business gives you a small percentage of ownership in that business. This can lead to higher returns later as the company earns profits.
How Does Investing Work?
Once you know the answer to what is investing you can start learning how it works and how to use it to your own advantage. Investing is a symbiotic financial relationship that can potentially benefit both parties in the transaction.
A stockholder gives funds to a business, which in turn helps that business have the funds it needs to be successful. The business's success then leads to higher profits that grow what the stockholder originally funded.
Besides learning what is investing, there are also a few other investment terms you need to know in order to form your own investment strategy. You can't accurately understand what is investing without also understanding the following closely related terms.
An annuity is a type of contract that outlines a sum of money to be paid to the annuity holder. This type of contract is often made between an individual and their insurance company.
An asset is another term for a resource or investment. Assets are property that has value. This might include things like your house or vehicle.
A dividend is a sum of money regularly paid to shareholders for holding onto their stocks in that company. It acts almost like a reward or incentive for shareholders to keep their shares in the company rather than selling.
Interest rate is usually shown as a percentage of monetary growth on the principal amount. Initial investments, or the principal amount, grow because of their interest rate.
Return on Investment (ROI)
One of the major components to what is investing and why investing works is return on investment. It is always important to calculate the potential risks alongside the potential rewards with any investment. Knowing how to calculate Return on Investment (ROI) can help beginners weigh the pros and cons for themselves.
Types of Investments
When learning what is investing, it helps to understand the different types of investments. There are all kinds of investment types, all with different interest rates, risk tolerance, potential capital gains, and short term or long-term plans.
When learning about what is investing, you'll hear the term "stocks" and "shares" used a lot. A stock is a small portion of ownership over a company. They can also be called a "share." When you help fund a company with your own money, you are making a financial investment in that company.
A stockholder also financially owns a portion of that company. Many companies will have different tiers of investors to distinguish between small and major investors.
Common stock is a type of stock that gives the shareholder ownership within a company. These stockholders help elect the board of directors that run the company. Common stocks are a form of long-term stock that can have higher rates and thus higher capital gains.
The term "bonds" is another term you'll hear a lot when learning all about what is investing. Bonds are a type of loan you give to either a company or the government. You purchase the bond and that money is then lent to the organization that needs it. Later, you can get that money back plus interest.
Bonds are a way to lend money and accumulate interest on the money you lend. Corporate bonds are when you lend money to corporations. This bond money is a way of investing in a business while making your money back plus interest.
Mutual funds are a very common type of investment for beginners, so you might hear about them a lot when first learning about what is investing. A mutual fund is like an investment group. Instead of working alone in a single stock, you can join a mutual fund that allows you to invest in more places for less.
Mutual funds can be great for beginners or anyone who doesn't want to spend too much personal time managing their accounts.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) are similar to mutual funds, but their value can change throughout the day while mutual funds change on a day-to-day basis. ETFs can hold assets like stocks, bonds, currencies, and commodities.
Certificate of Deposit (CD)
A certificate of deposit (CD) is like a savings account, but it is locked for a period of time to accumulate interest. This could be a matter of 3 months or even up to 5 years.
Money Market Accounts
Money market accounts can also be called money market deposit accounts. They are similar to high yield savings accounts but they are instead high yield deposit accounts. They let your deposits grow through interest rates. These rates often fluctuate based on the current market interest rates.
Examples of Safe Investments
If you are a beginner investor, just now learning all about what is investing, then you may want a safe investment to start out with. Fortunately, there are many safe investments to choose to put your money into.
High Yield Savings Accounts
A high yield savings account is a savings account that has a higher rate of growth. These accounts are an extremely safe investment form because there is hardly and risk involved. Whether you're saving for the long term or the short term, for 30 years or 5 years, a high yield savings account can help your money grow.
Real Estate Investment Trusts
Invest in real estate by investing in a real estate investment trust (REIT). REITs are companies that own and operate commercial real estate. Commercial real estate houses business that brings in profit. By investing in REITs, you can take part in this profit too. Investing in real estate in general is a great idea because this investment comes with a physical asset (the house, the building, the property) to secure the investment.
You might not think of retirement when you think of what is investing, but retirement accounts are actually another safe investment example. Not only are they relatively safe, but retirement accounts are important for everyone to have. Some retirement accounts have a higher rate of growth than others. Plan for retirement by investing in your retirement.
How to Start Investing
Now that you understand more about what is investing and how it works you can learn how to start investing for yourself! Investing for beginners can be as complicated or as simple as you choose to make them. There are ways to make it extremely easy and other ways that can make the process very complicated. Here are some of the basic steps for how to start investing so you can learn how to invest money responsibly:
Step 1: Research Investments
The first thing you need to do is research. Research stocks, companies, brokerage accounts, everything.
For a beginner, you might want to consider mutual funds or hiring a broker. One of the simpler ways to start is to join a mutual fund that takes care of itself.
Investment apps can make the process very simple and automate a lot of the process for you. CDs can be a very safe way to make your first investment with as little risk as possible.
Once you choose how to invest you can look into which investments you want to make and start forming your own investment strategy
Step 2: Create an Investment Strategy
Now that you've decided on the how and the what, you can start making plans for your investment strategy and budget.
Most investments are going to include using your own funds in some way. If this funding is a regular payment, then include that payment in your personal budget.
If you need to save up to make a one-time, lump-sum payment, then include those savings into your personal budget as well.
It's also important to plan for the future. Interest often needs to accumulate for a long time before the ROI will be worthwhile. Make plans now for how much you'll invest and for how long you'll leave those investments alone to accumulate interest.
Step 3: Open a Brokerage Account
A brokerage account is where you'll keep your investment portfolio. Some brokers will provide full services, managing your account for you, while others will require more personal management on your part.
A full-service broker might come with management fees, commissions on trade, or advisory fees, but those fees could be worth it if you're getting professional management that helps your money grow.
These are the kinds of pros and cons you'll need to weigh when shopping for your brokerage account.
Once you have the how, what, and who all figured out you can start! Remember, investments can take time to accumulate profit, but if you've weighed your pros and cons then the ROI will be worth the wait.
Investing is for everyone. Anyone can do it, especially with the online investing tools available today.
Use Check City's tax preparation services to account for your investments this year and get the most out of your refund this year.
Check City does not offer investment, advisory, or brokerage services and does not advise investors to buy or sell any specific stock. This article is meant to provide some basic information only about investing in general. For professional investment advice, reach out to a professional investment advisor or broker.