When you were a child, you probably kept your money in a piggy bank or some equivalent container in your bedroom. You dropped coins or stuffed bills in the top and then shook them out of the bottom whenever you needed a little cash. If you put every cent of your allowance into your bank and did not spend it, over time you might have saved a couple of hundred dollars, but the only money inside was money that you put in yourself.
Putting your money into a savings account at your local bank is not much different than keeping it in a piggy bank at home. While a bank will pay you interest on the money in your account, interest rates on savings accounts are low and the amount of money you have will increase at a very slow rate.
What is Investing?
Investing refers to the act of using your money to buy some sort of financial product (or other item) in the hope and expectation that the product will grow in value after you buy it. If the product does increase in value, you can sell it for a profit. Some investments are meant to be held for a long time before they grow, such as money you may invest now to use later when you retire.
Other investments are more short-term; you may buy one now, hold it for a year or less, and then sell it. Some people take the money they earn from these short-term investments and reinvest the profits in another investment.
What are Some Types of Investments?
Almost anything you buy now that you think you can sell for more money later is considered an investment, including things like real estate, collectibles, stocks and bonds.
A stock is a share of ownership in a company. The value of a share of stock fluctuates daily based on the company’s earnings, profit potential, the general economy and other factors. People who invest in the stock market generally buy shares in a number of different companies and hold them for a long time.
A mutual fund is a group of stocks that is selected and managed by a professional money manager. Investors buy shares in the mutual fund and the manager has task of buying and selling the individual stocks in the fund to try to make the overall value of the fund grow. The stocks in a mutual fund usually have something in common, such as all being from companies that relate to the energy sector.
A bond is a financial product that you buy at a set price, hold for a specific period of time, and then redeem at the bond’s maturity rate for a gain, which is set by the terms of the bond. Bonds may pay periodic interest during their lifetime or may only pay out at the end.
Are There Risks Associated with Investing?
Almost all investments carry some risk that the product or item will lose value instead of gain over time. Some investments, such as bonds, are very low risk because they have set terms governing their payout. Buying individual stocks is more risky because their value depends on the volatility of the stock market, which is very difficult to predict.
Mutual funds are somewhere in between, depending on the fund and the type of stocks in it. Generally, riskier investments have a greater potential for growth or loss. Low-risk investments do not earn the investor as much money but the money they do earn is predictable and secure.
If you want your money to grow a substantial amount, you should invest.