Foundational Knowledge: What is investing?

When you hear someone say investing, what do you think? Do you think the stock market? Real Estate? Or is it a completely foreign concept to you?

Well, whatever answer you came up with is ok, because we all start somewhere. This article will be a short crash course on what investing is, and some of the different types of investments there are.

A simple definition of investing is spending your money or some other resource such as time or effort with the expectation of receiving more in return after completion. Now, we must know that not all investments work out. You may lose money or time and not have any return, possibly even taking a loss.

In most cases, the higher the potential return is, the higher the risk of losing it is. This is what investing boils down to, how much risk are you willing to take to see a larger return on your money?

Now that we have a basic idea of what an investment is, here is a little list of just a small portion of the ways you can invest your money!

  1. Buying shares of companies (i.e. stock trading)
  2. Savings Accounts
  3. Real Estate
  4. Peer-to-peer lending (very risky)

The first option, buying shares of companies is the option that has the most flexibility in how much risk you take with each investment. Buying shares of companies with a proven track record of success, as well as low price volatility will usually yield a few percent a year in growth, as well as a small dividend. But, buying shares in new companies with high growth potential is where you can end up making the most money.

For example, if you had bought 10 shares of Nike back in 2006 when the value was $10 per share, your investment of $100 would be worth $1030 (as of today). That is more than ten times the value of what you paid for it!

The second option is by far the lowest risk, as the savings rates guarantee your return. These rates tend to be between 0.5% and 3% depending on the economic climate and the bank you are with!

The third option, real estate, needs a lot of cash to start, but, once you get in, it can be a very fruitful way to have money coming in every month with rent payments! As with any investment, there is risk, but, if you can find undervalued properties, and can find good tenants to rent your properties, you will find great return on investment.

Photo by David McBee on Pexels.com

The final option I listed (and by no means the only other way to invest your money), peer-to-peer lending, is by far, the riskiest of the investment options listed above. In this situation you are acting just as a bank would, offering someone a loan with an interest rate attached to the loan. The risk comes from if the person defaults on the loan (ends up not paying). Not only do you lose out on the interest payments, but, you could also lose all of the money that you loaned out in the first place.

Each investment option has a level of risk, find your risk tolerance, and start searching for investments you believe in!

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