What is investing? Quite simply, investing is when you use your money in order to make more money in the future. This can be done by investing in a business, asset, or other endeavor.
Investments can take many forms, though they share a variety of characteristics:
- You contribute money, your time, or other resources (e.g. materials, property, equipment, etc.) in exchange for a share of future revenue or profits.
- There is some risk that you will contribute your resources and the investment will lose value (e.g. the business loses customers, the land is sold for less money than it was bought for, etc.).
- The greater the risk you take, the greater the expected reward / potential upside.
What is investing?
(Note: this is an oversimplification)
We said before that investing is when you buy an asset and expect to see a benefit in the future. We never said that you have to buy that asset in a particular way. That means that investing can look very different depending on the situation. It could look like this:
- Buying stock through a brokerage in a major public company.
- Writing a check to a family member who is starting a small business.
- Accepting equity in a company instead of payment for products or services that you give that company.
Regardless of what it looks like, the starting point is the same – you are “invested” in the success of a company and you will succeed when that company succeeds. You are a part owner of a small piece of the company and the value of your investment grows when the value of the entire company goes up.
Let’s say that you invested $10,000 three years ago in a small business that your friend started. At the time, she sold you 10% of her company for that $10,000, which gave the company a valuation of $100,000. Now your friend is selling her company for $1,000,000. Congratulations – your 10% of the company is now worth $100,000! In the course of three years, your investment increased in value from $10,000 to $100,000.
How do I invest?
It’s hard for a lot of people to invest in small businesses. Private investments are hard to find, difficult to evaluate, and do not offer the ability to quickly sell the investment. For that reason, we’ll focus our discussion on investments in the stock of publicly traded companies. These are the companies that have shares of stock available for sale on stock exchanges like the New York Stock Exchange.
For publicly traded stocks, investing is very simple. You open an investment account – called a brokerage account – and contribute money into that account. From there, you can purchase stock in a specific company or group of companies through that brokerage age. Once you purchase stock, you can see your investments in that account and determine if the value has increased or decreased. If the price of the stock is higher than when you bought it, your investment has increased in value. If the price of the stock is lower than when you bought it, your investment has decreased in value.
What can you invest in?
The range of potential investments – or assets, projects, or other endeavors that you can invest in – is very wide. Some of the most common assets are:
- Stocks (pieces of publicly traded companies – also known as public equities)
- Bonds
- Land / housing
- Raw materials / commodities
- Art
- Currency (including cryptocurrency)
Each type of investment is unique and may be impacted by a variety of factors (e.g. consumer spending habits, interest rates, currency exchange rates, etc.).
