Investing explained: types of investments and how to get started (2024)

What is investing?

Investing is, broadly speaking, the act of putting money into some project or business over a period of time to generate a positive return (that is, profits that exceed the amount of the original investment). It is the act of allocating resources, usually capital (i.e. money), with the expectation of generating an income, profit, or profit.

One can invest in many types of activities (direct or indirect), such as using money to start a business, or in assets such as purchasing real estate in the hope of generating rental income and/or selling it later at a higher price to resell.

Investing is differentsavingsby deploying the money spent, which means there is an implicit risk that the related project(s) will fail, resulting in a loss of money. Investing also differs fromspeculationin the sense that in the latter the money is not necessarily set in motion, but is used to respond to short-term exchange rate fluctuations.

Understand the investments

By investing, your money grows over time. The expectation of a positive return in the form of income or price increasesstatistical significanceis the starting point of investing. The spectrum of assets in which one can invest and achieve returns is very broad.

Risk and returngo hand in hand with investing; Low risk generally means low expected returns, while higher returns usually come with higher risk. At the low-risk end of the spectrum are basic investments such as certificates of deposit (CDs); bonds or fixed income instruments are higher on the risk scale, while stocks are considered riskier. Commodities and derivatives are generally considered among the riskiest investments. You can also invest in something practical, such as land or real estate, or delicate things, such as art and antiques.

Risk and return expectations can vary greatly within the same investment category. For example, ablue chiptrading on the New York Stock Exchange will have a very different risk-reward profile than onemicro-capthat is traded on a small exchange.

The return an asset generates depends on the type of asset. For example, many stocks pay quarterly dividends, while bonds generally pay interest quarterly. In many jurisdictions it isdifferent types of income are taxed at different rates.

In addition to regular income, such as dividends or interest, appreciation is an important part of the return. The total return of an investment can therefore be considered as the sum of income and capital growth. Standard & Poor's estimates that dividends have contributed nearly one-third of total stock returns for the S&P 500 since 1926, while capital gains have contributed two-thirds.Added valuesis therefore an important investment piece.

Types of investments

Today, investments are usually associated with financial instruments that allow individuals or companies to raise capital and distribute it among companies. These companies then raise this capital and use it for growth or profitable activities.

While the universe of investments is vast, these are the most commontypes of investments:

Shares

A buyer of a companypilsbecomes co-owner of the company in question. Owners of a company's stock are known as its shareholders and can participate in the company's growth and success through share price appreciation and regular dividends paid from the company's profits.

Bonds

Bondsare debt obligations of entities such as governments, municipalities and companies. Buying a bond means you own part of an entity's debt and are entitled to periodic interest payments and the return on the face value of the bond when it matures.

midden

Funds are bundled instruments managed by investment managers that allow investors to invest in stocks, bonds, preferred shares, commodities, etc. Two of the most common types of funds areinvestment associationsInexchange traded fundsor ETFs. Mutual funds are not traded on an exchange and are valued at the end of the trading day; ETFs trade on stock exchanges and, like stocks, are constantly valued throughout the trading day. Mutual funds and ETFs can passively track indexes, such as the S&P 500 or the Dow Jones Industrial Average, or can be actively managed by fund managers.

Investment associations

Trusts are another type of pool investment.Real estate investment trusts (REITs)is one of the most popular in this category. REITs invest in commercial or residential real estate and regularly pay distributions to their investors from the rental income they receive from those properties. REITs trade on stock exchanges, thus offering their investors the benefit of immediate liquidity.

Alternative investments

Alternative investmentsis an umbrella category that includes hedge funds and private equity. Hedge funds are so called because they can hedge their investment efforts by going longCardon shares and other investments. Private equity allows companies to raise capital without going public. Hedge funds and private equity were typically only available to wealthy investors who were considered 'accredited investors"that met certain income and asset requirements. But in recent years, alternative investments have been introduced in fund formats available to retail investors.

Options and other derivatives

Derivativesare financial instruments that derive their value from another instrument, such as a share or an index. Options contracts are a popular derivative that gives the buyer the right, but not the obligation, to buy or sell a security at a fixed price within a specified period of time. Derivatives usually useacceleration, making them a high-risk, high-reward proposition.

Raw materials

Raw materialsincludes metals, oil, grains and animal products, as well as financial instruments and currencies. They can be traded through commodity futures (which are agreements to buy or sell a specific quantity of a commodity at a specific price on a specific future date) or through ETFs. Commodities can be used to hedge risks or for speculative purposes.

Compare investment styles

Let's compare some of the most common investment styles:

• Active versus passive investing:The goal of active investing is to "beat the index" by actively managing the investment portfolio.Passive investments, on the other handadvocates a passive approach, such as buying an index fund, that tacitly acknowledges that it is difficult to consistently beat the market. While there are pros and cons to both approaches, in reality few fund managers beat their benchmarks consistently enough to justify the higher costs of active management.
• Growth vs. Value:Growth investorsprefer to invest in high-growth companies, which tend to have higher valuation ratios, such as price-to-earnings (P/E) ratios, than value companies.Value investorslook for companies that have significantly lower price-to-earnings ratios and higher dividend yields than growth companies, as they may be temporarily or long-term out of favor with investors.

How to invest

Do-it-yourself investment

The question of "how to invest“It comes down to whether you are a do-it-yourself (DIY) investor or prefer to have a professional manage your money. Many investors who prefer to manage their money themselves have discount accounts or online brokers because of their low commissions and the ease with which they can manage their money and execute trades on their platforms.

Do-it-yourself investing is sometimes called self-directed investing and requires a fair amount of education, skills, time commitment, and the ability to keep one's emotions in check. If these characteristics don't describe you well, it may be wiser to let a professional help you manage your investments.

Professionally managed investments

Investors who prefer professional money management generally have asset managers who manage their investments. Asset managers usually charge their clients a percentage of the assetsunder management (AUM)as their fees. Although professional money management is more expensive than managing money yourself, such investors do not mind paying for the convenience of delegating research, investment decisions andhandelto an expert.

Roboadvisor Investment

Some investors choose to invest based on suggestions from automated financial advisors. Powered by algorithms and artificial intelligence,robo-advisorscollecting critical information about the investor and his risk profile to make appropriate recommendations. With little or no human intervention, robo-advisors provide a cost-effective way to invest with services comparable to what a human investment advisor provides. Thanks to technological advances, robo-advisors are able to do more than just select investments. They can also help people develop retirement plans and manage trusts and other retirement accounts, such as 401(k)s.

A brief history of investing

Although the concept of investing has been around for thousands of years, investing in its current form can trace its roots back to the period between the 17th and 18th centuries, when the development of the first public markets connected investors with investment opportunities. ThatAmsterdam Stock Exchangewas founded in 1602, and theNew York Stock Exchange (NYSE)i 1792.

Investing in the industrial revolution

The Industrial Revolutions of 1760–1840 and 1860–1914 resulted in greater prosperity, as a result of which people accumulated savings that could be invested, stimulating the development of an advanced banking system. Most of the established banks that dominate the investment world started in the 19th century, including Goldman Sachs and J.P. Morgan.

The investment of the 20th century

The 20th century broke new ground in investment theory, with the development of new concepts in asset pricing.portfolio theoryand risk management. The second half of the 20th century saw the introduction of many new investment vehicles, including hedge funds, private equity, venture capital, REITs and ETFs.

In the 1990s, the rapid spread of the Internet made online trading and research opportunities available to the public, completing the democratization of investing that had begun more than a century earlier.

The investment of the 21st century

The bursting of the dot.com bubble – a bubble that created a new generation of millionaires from investments in technology-driven and online business stocks – ushered in the 21st century and perhaps set the stage for what was to come. In 2001, the collapse of Enron came into focus with the full display of fraud that bankrupted the company and its accounting firm Arthur Andersen, as well as many of its investors.

One of the most remarkable events of the 21st century, or history, isGreat recession(2007-2009), when an overwhelming number of mortgage-backed investment failures crippled economies around the world. Well-known banks and investment companies collapsed, bankruptcies took over and the wealth gap widened.

The 21st century has also opened up the investing world to newcomers and unconventional investors by saturating the market with discount online investment firms and free trading apps like Robinhood.

Investment versus speculation

Whether the purchase of a security qualifies as an investment or speculation depends on three factors:

• The amount of risk taken: Investing usually involves lower risk compared to speculation.
• The holding period of the investment: investing generally involves a longer holding period, often measured in years; Speculation involves much shorter holding periods.
• Source of return: Price appreciation can be a relatively small part of the return on the investment, while dividends or distributions can be a large part. In speculation, price increases are usually the most important source of return.

Since price volatility is a common measure of risk, it stands to reason that a stable blue chip is much less risky than acryptocurrency. So buying a dividend-paying blue chip with the expectation of holding it for a number of years could be classified as an investment. On the other hand, a trader who buys a cryptocurrency to make a quick profit in a few days is clearly speculating.

Example of return on investment

Suppose you bought 100 shares of XYZ stock for $310 and sold them exactly one year later for $460.20. What was your estimated total return if you ignored commissions? Please note that XYZ does not issue stock dividends. The resulting capital gain would be (($460.20 - $310)/$310) x 100% =48,5%.

Now imagine that during your holding period, XYZ issued dividends and you received $5 in dividends per share. stock. Your estimated total return would then be50,11%(Additional values:48,5%+ Dividend: ($500/$31.000) x 100% = 1,61 %).

In short

Investing is the act of distributing resources to something to generate income or earn a profit. The type of investment you choose will likely depend on what you want to achieve and how sensitive you are to risk. Assuming little risk generally yields a lower return, and vice versa as assuming high risk. You can invest in stocks, bonds, real estate, precious metals and much more. Investments can be made with money, assets, cryptocurrency or other means of exchange.

There are different types of investment vehicles, such as stocks, bonds, mutual funds and real estate, each with different levels of risk and reward.

Investors can invest independently without the assistance of an investment professional or use an authorized and registered investment advisor. The technology also allows investors to receive automated investment solutions through roboadvisors.

The amount of money required to invest largely depends on the type of investment and the investor's financial position, needs and objectives. However, many vehicles have lowered their minimum investment requirements, allowing more people to participate.

Regardless of how you decide to invest or what you decide to invest in, you should research both your objective and your investment manager or platform. Perhaps one of the best pieces of wisdom from veteran and seasoned investor Warren Buffet is, “Never invest in a company you don't understand.”