The Definition of Investment: Piggy Banks, Coffee Cans, Stocks and Bonds
Investments can take two basic forms. First, an investment can be the purchase of goods, supplies, tools, or equipment to use in the production of increasing profits. For example, a businessperson who produces shoes may purchase a machine that automatically stitches leather in the hopes that the time saved will allow for the production of more shoes and increased sales.
The second basic form an investment can take is what most of us think of when we say we are investing our money. That is, we use the money we have for the specific purpose of making more money from it.
There are several different ways of investing money in the hopes of gaining a profit. Stocks and bonds, exchanging currencies in the Forex market, annuities, certificates of deposit, mutual funds, buying real estate to sell at a profit later (Flip That House!), IRA’s, even simple savings accounts, are all methods of investing. Even loaning your brother-in-law a few bucks (at a reasonable interest rate) to start a business is an investment.
Generally speaking, the riskier the venture is, the more opportunity there is to make a higher profit; the less risky, the lower the proceeds. The FDIC guarantees savings accounts and therefore, putting your money in a savings account with the idea that you will get a fantastic return on your money is not very realistic.
A savings account has little to no risk whatsoever; therefore, the return on investment is weak. Of course, it’s always a good idea to have liquid assets, and a savings account is one way to do so. Most middle-class Americans should have enough in their regular savings account to tide them over in the event of an emergency or job loss.
Quiz: Does putting your money in a coffee can and burying it in the backyard qualify as an investment? (see answer at end of article)
Purchasing stock in a company makes you part owner of that company. The two ways to make money from owning stock are to secure dividends and/or sell the stock for a higher price than what you paid for it. Sounds simple, right? Well, the basic concept is quite simple; it’s the day-to-day reality of the stock market that makes this type of investment a bit more complicated. There is no guarantee whatsoever that the stock you choose will make a profit. In fact, you can easily lose your entire investment. The potential for a tremendous profit exists, however, if the stock (company) hits the big time.
Quiz: Which is riskier? Loaning money to your brother-in-law or buying stocks by closing your eyes and pointing? (see answer at end of article)
When you are deciding how to invest your money, the two major considerations are how
much of a return on your investment you want to see and how much risk you are
comfortable with. Once those two questions are answered, it is time for you to seek out
an investment professional and start making yourself some money.
No, sorry Jed Clampett. The coffee can qualifies as hiding or saving, but not investing.