The definition of investment is the spending on and accumulation of capital and resources that produce economic benefits, goods, and services. However it is worth noting a distinction between investing and saving.
Saving occurs when one does NOT spend on consumption and consumer goods. If one were to hide their cash under their mattress, they may be saving, but they are not investing because their money is not being put to productive use. However, once one begins to save, one is then able to invest.
Why Invest Your Money?
Before we starting buying shares of stock on the stock market, it's important to know what you can accomplish by investing your money. Despite the diversity of investors and their needs in the marketplace, we can broadly say that all investors are looking to achieve one or more of the following objectives:
- Sustain cash flow needs over a period of time
- Attain future financial growth objectives or meet future financial commitments
- Preserve wealth and hedge against economic risks
This means investing your money should either provide you with an investment income, meet your financial goals, or provide financial security for you in the future. Your goals may include paying for an education, investing for retirement, or maintaining your desired lifestyle.
What To Invest In
There are a variety of investment products available that can provide investment income, capital appreciation, or wealth preservation. Investment products range from low risk investments to high risk investments. The classic investment options available are cash (and cash equivalents), commodities, stocks (equity), bonds (debt), and real estate. You may have also come across other investing ideas.
The stock market is often what first comes to mind. Stocks are shares of companies that can be traded on the stock market. Stock market trading is big business, and there are a variety of ways to buy stock. Stocks can be purchased through an online stock broker or through an investment adviser.
There are also a variety of ways of investing in shares. Stock shares can be traded directly on the stock market, or invested in indirectly through mutual funds. Stock options can also be traded that give you the choice of exercising a right to buy stock at a specified price in the future.
Investing in bonds is also another investment option. Bonds are debts issued by a company or government municipality that you can buy at a discount. You can either redeem the value of the bond, or sell the bond on the bond market.
Real estate investments are another common method of how to invest money. Investment property yields a return through rental income and a gain through appreciation. Real estate investments take longer to buy and sell relative to stocks and bonds. Since these investments are not easily converted into cash, they are not considered to be liquid assets. An advantage of investment real estate is you can borrow money in the form of a commercial mortgage to buy real estate .
What Is The Best Way To Invest?
There are such a large number of investment opportunities available to us that it may seem easy to do, but it is critical to seek investment advice and know investing basics. The world of investors is highly diverse and complex which is compounded by their range of financial needs, objectives and constraints. It encompasses all the individuals, businesses, and private and public institutions as they invest and manage their resources.
In response to the demand for capital and the needs of investors, a multitude of ways to invest have evolved. Private and public capital markets have also evolved accordingly to facilitate the exchange of available investment funds and investment products.
Investors must align their situations, constraints, and objectives with the investment options they have available to them. The investment options must be weighed against the following criteria:
- Size - What is the amount the investor is looking to invest? What size investment is required to meet investor objectives? Does the investor have the means to make such an investment, and if not, what are the options to raise the additional required funds.
- Time Period - Does the nature and life of the investment as well as entry and exit strategies correspond to the time horizon of the investor?
- Liquidity - How quickly and how costly is it to convert the investment back to cash?
- Risk - How risky is the investment? What are the risk factors? What determines the value or cash flows of the investment and how predictable and controllable are they?
- Management - What level of management or involvement is required by the investment? Does the investor have the people, time, resources, and skill to manage and maintain the investment?
Successful investing means bringing all these factors together so the investor either meets or exceeds the goals and expectations they established when they initially made the investment.
In the next section, we will further explore one of the investment asset classes we mentioned, investment real estate.