Investing papers on desk

10 Aug A Guide to Understanding Investments

People toss around the word “investment” to describe so many different things. People say that their new television is an investment, as is their 401k, their car, their home, and their new shoes. Some people use the word to classify a large purchase, while others use it to classify a purchase with growth potential. So what does the word really mean?

Defining Investment

Many people misuse the term “investment.” According to the Merriam-Webster dictionary, an investment is: the act of putting out money in order to gain a profit. For example, saying that your car is an investment is a false idea. Cars are constantly depreciating in value. In fact, if you buy a new car, it instantly loses about 10% of it’s value. Every year after that it continues to lose 10% more. On the other hand, something like a stock or bond has a chance of increasing every year. It requires research and analysis to determine what is worth investing in. It is not a gamble, as there is a good chance of earning more money.

Understanding Stocks and Bonds

The stock market is something often talked about but rarely understood. Buying stock in a company means that you buy a portion of the company. So anything the company earns, you get a piece of it. Bonds, on the other hand, are a way of lending money to a company or to the government. You are a creditor, not an owner, of a company. Always invest in companies with a good future. Could you imagine if you were one of the first investors in Google?

Start Early

The earlier you start investing, the more money you will end up with. This is due to compound interest. If you were to invest, say 1,000 into something with a 5% interest rate annually, after one year, you will have $1,050, earning $50 from interest. If you choose to invest that interest, the next year, you will earn $52.5 instead of just $50, making your total $1,102.5. The next year, you will earn $55.125, bringing your total to $1,157.625. Every year, your money will keep growing due to compound interest. After 10 years, you will have $1,628.89.

Don’t Put All Your Eggs In One Basket

Too many people invest everything they have in one venue. If that one venue crashes, they suddenly find themselves broke. Use many different investments to grow your money. Keep some in stocks, bonds, precious metals, the bank, mutual funds, etc.

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