What Does it Mean to “Invest”?
Before I had learned much about personal finance, I thought investing was what you saw in such movies as Wall Street. I pictured stressed out men and women standing on a trading room floor, screaming and yelling at each other while holding pieces of paper in their hands. I thought that investing was something very complex and difficult, but in actuality it can be something quite simple. Dictionary.com defines “invest” as “to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.” In other words, it can be seen as a way for your money to make money. There are many investment vehicles available to you, such as stocks, bonds, index funds, and real estate.
How Does Investing Make You Money?
There are many ways that your investments can make you money. One way is through interest payments, such as with savings accounts and CD’s. Another way is by appreciation of the value of the investment, such as an increase in the price of a stock or rise in value of real estate. Yet another way is through dividends, which are distributions of a portion of a company’s earnings to its shareholders. Finally, investing can make you money through compounding. Simply put, the money that you make earns money, which in turn earns money.
What Can You Invest In?
As previously mentioned, there are a lot of things you can invest in. Stocks, bonds, and mutual funds are some options. Real estate and small businesses are others. Heck, you can even invest in yourself, which is probably one of the best investments you’ll ever make.
A Word About Investing vs. Speculating
I’m a fan of investing. I’m not a fan of speculating. What’s the difference? I think Burton Malkiel summarizes the differences well in his book A Random Walk Down Wall Street. He writes, “A speculator buys stocks hoping for a short-term gain over the next days or weeks. An investor buys stocks likely to produce a dependable future stream of cash returns and capital gains when measured over years to decades.” I tend to agree with his distinction, especially in regards to time frame. The informational pages that follow in the Finance 101 section are written with the investor in mind, not the speculator.