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What Is an Investment?

by James Musoba
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An investment is an injection of money to gain income or preserve capital. There is a difference between financial investments (acquisition of securities) and real (investments in industry, construction, etc.). Investing means your money is working for you. This approach to money should fundamentally change the way you think about how to make money.

People who invest are called investors. Anyone can become a private investor — a middle-level manager, financier, therapist, teacher, student, or retiree — this does not require special education. For them, this is a way to obtain additional income. Traders are the opposite of investors; they constantly conduct short-term transactions. This type of activity is their main source of income.

Even though investments are aimed at making a profit for an investor, they are not a sure-fire way to get it. Different investment methods provide different guarantees of income. But in all cases, there is a risk that instead of profit, the investor will lose money.

Private Investment Methods

There are many ways to invest money in exchange. Some do not require deep knowledge of the financial markets, while others are dealt with only by professionals.

The most common items for investment on the stock exchange include:

  • stocks;
  • bonds (government or corporate);
  • precious metals (gold, silver, platinum);
  • exchange-traded funds ETF;
  • buying currency;
  • derivative financial instruments (futures, options, swaps, etc.)

Investment Terms

For convenience, private investments are divided into groups depending on the terms. There are three of them:

  • short-term (up to a year);
  • medium-term (1-3 years);
  • long-term (3 years and more).

Investing Style

Nowadays, two main styles of investing have emerged. The first is passive investing. It is characterized by long-term investments. This style assumes that a person has invested money, for instance, in the shares of a company, and holds them for several years without selling. As a rule, passive investments are made in large commodities, technologies, financial companies — they have a lower risk of a sharp drop in quotations. Often, such companies pay dividends.

The second style is aggressive investing. This implies that the investor is investing in riskier instruments. For instance, in the shares of not the locomotives of the industry, but smaller companies. When the markets fluctuate, such securities rise or fall more strongly (that is, they have high volatility). But due to the same quality, you can earn more. This type of investment is typical for forex trading and requires a deep understanding of the market and a readiness to lose the investment. In this case, pip-calculator from Forextime in India comes in handy.

How a Private Person Can Invest

An individual cannot trade on the exchange independently. There are intermediaries between the exchange and the investor — brokers. You need to open a brokerage account, after which the owner of the account is allowed to buy/sell securities.

Brokers also provide the services of a professional manager. Together with specialists, you choose an investment strategy, agree on the conditions under which shares to buy/sell, and then the manager makes situational decisions on your portfolio.

Profitability and Risks

Investments have two key features that are directly related. These are profitability and risk. The higher the risk with which the investment is associated, the higher the potential return can be. And vice versa — relatively reliable investments never allow counting on high earnings.

For instance, a bank deposit, which can also be considered an investment, or the purchase of government bonds is a low-risk investment. Bank deposits are insured, and in the case of government bonds, the state acts as the guarantor of the money back. But the return on such investments is also lower than the potential return on stocks, which can be influenced by a variety of reasons — from market to corporate.

Another example can be used to illustrate the relationship between risk and return. Bonds with a 10-year maturity yield a higher return to the buyer than, for instance, 3-year bonds. The following principle applies here: the longer the maturity of the bond, the greater the risk the investor takes on (after all, much can happen even with government bonds in 10 years) and, accordingly, the more he/she needs to be rewarded for this risk.

Types of Investments

Investments are not limited to private equity investments or financial derivatives. In a broad sense, the term “investment” can be extended to any investment by an individual or a company, be it money, tangible assets or intangible ones.

Main investment classes:

  • Real investment. These include the purchase of a ready-made business; acquisition of intangible assets such as patents, copyrights, trademarks, etc., construction, reconstruction, major repairs.
  • Financial investments. These include the purchase of securities or financial derivatives.
  • Speculative investments. In this case, the main feature of the investment is the rate of income due to changes in the price of the asset.
  • Venture investments. This is the term for long-term investment in young companies. Venture capital investments are associated with a high risk of completely losing investments, but they can also bring investors significant profits.
  • Portfolio investments. These are investments not in one type of asset (for instance, a share of a particular company), but several at once, which are formed as a portfolio of several securities.
  • Intellectual investment. This can be the training of specialists, scientific developments, objects of intellectual property, the creative potential of a group of people, etc.

It’s High Time to Invest

As a rule, people want to increase capital to be financially independent and confident in the future. But today, investing is becoming more of a necessity than a luxury or an auxiliary source of profit. If you think about your future now, you will protect yourself.

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