Investing

Investing is a term that is frequently tossed around and used in various contexts, but if you are interested in learning how to make your money work for you, then you are ready to learn about investing from a financial standpoint.

The term "investment" is defined as something that is purchased with the expectation that it will increase in value, producing a profit.

There are three (3) basic categories of investments:

• Ownership
• Lending
• Cash Equivalents

Ownership

The most common type that comes to mind when you hear the word "investment" is that of ownership investments.

They tend to carry a higher degree of risk than other types of investments and can be more volatile, but they usually have the best rate of return. 

There are a number of ways to participate in ownership investing, and it is always a good idea to make sure that you understand the risks, the potential for returns, and other terms of the transaction when purchasing ownership investments.

Stocks

When someone says they bought stock, what they are saying is that they purchased shares in a corporation.

Each share of a corporation has a monetary value and whether you purchase one share or several shares, you own stock in that company. 

Other Securities

In addition to stocks, there are other types of ownership investments that function in a similar fashion as stocks. Examples include, but are not limited to:

• Commodity Futures
• Currency Swaps
• Stock Options
• Exchange Traded Funds

The amount of money that you can expect to gain from the purchase of ownership investments depends upon how they perform in the market.

Depending upon the type of investment you have purchased, you can sell stock when the market reacts favorably, hold the stock in the hope it will continue to gain additional value or exercise actions as provided for in the contract, such as with a futures or options contract. 

Business Investment

The capital needed to start up and run a business can be classified as an ownership investment and is quite possibly one of the most challenging types of investment.

This is because the cost of investment involves more than just money. It requires a great deal of time and research. 

On the positive side, the potential for returns on this type of investment is sizable.

Successful entrepreneurs who have helped to inspire others in this type of venture include Sam Walton and Bill Gates.

Real Estate

Purchasing apartments, houses, commercial buildings or other types of property can be a profitable venture.

Most real estate investors look for property that is priced below market value or that has the potential to be improved upon to increase the existing market value. 

Precious Metals and Collectibles

Precious metals such as gold and collectibles such as works of art or rare coins are also considered to be ownership investments. 

There are risks with this type of ownership investment.

One is the need for adequate and safe storage space to protect them as much as possible, but there is no foolproof way to protect these assets from damage or erosion.

The costs that are incurred to protect these assets also tend to cut into any profits derived from the sale of them.

Lending

Lending investments allow you, the investor, to act as the bank.

These investments include savings accounts and the purchase of bonds, including municipal bonds, mortgage-backed securities, and treasury bonds issued by the U.S. government.

Savings Accounts

You may not realize it, but if you have a savings account, you having a lending investment.

You deposit funds into your savings account, effectively lending the funds to the bank which in turn lends the funds out in the form of loans to its customers.

In return, the bank pays interest to you for the use of your money. 

If you wish to earn a higher rate of interest, you can open an account that yields a higher rate of return.

This typically includes certificates of deposit that are issued for a specific period of time for a higher rate of return.

Monies deposited into a certificate of deposit account are generally inaccessible for the term of the CD, so banks are willing to pay a higher rate of interest to the depositor for this assurance that the funds will remain in the account for the prescribed period of time.

The risk of loss with these types of deposit accounts is very low due to the fact that they are insured by the FDIC for up to $250,000.

Investors who choose to invest in bonds often do so for the slightly higher assurance of safety than is usually found in equities such as stocks.

For example, treasury bonds or bills are backed by the U.S. Government, and municipal bonds are backed by the governmental agency issuing the bonds. 

Cash Equivalents

Cash equivalents earn their name by their capability to be converted back to cash quickly and easily by the depositor.

The most common type of cash equivalent investment is a Money Market Account.

While the return on Money Market Accounts is comparatively small, they are usually better than traditional savings accounts without the restrictions of certificates of deposit.

Money Market funds can be accessed by writing checks on the accounts, although the number of checks allowed to be written is restricted to usually six (6) per month. 

Making Sense of It All

Investing should be approached with a full understanding of two basic factors: (1) Risk, and (2) Return.

It is always a good idea to seek guidance from a professional before jumping into the investment realm, but the returns can be profitable as well as enjoyable to watch.