What is Investment?

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Making an investment is a way to increase the amount of money an investor has by placing the money in a financial security. This can be investment in anything that potentially grows in value like stocks, bonds and bank accounts. Investment can be risky, but the possible gains often outweigh potential risks in the minds of avid investors.

Significance

Investment is a way for people to accumulate enough money to buy something very expensive. This can be a house, a car, a college education, or retirement. Investment is more than just saving. It makes money work for you by growing. If you do not invest, the buying power of your money decreases as inflation makes everything more expensive. Investment also provides emergency money in case of an unexpected expense from the loss of a job, medical costs or an accident.

Identification

Most people who earn a paycheck have investments. This can be as simple as opening a checking or savings account at a local bank. Many workers take advantage of employer sponsored 401k plans to invest for retirement. Others start their own IRA accounts for retirement. These types of accounts take advantage of tax deductions and exemptions as well as investing in securities. These are usually mutual funds containing stocks, bonds and money market funds. All of these investments have the potential to grow in value and pay interests or dividends.

Types

Different types of investments offer different risks and rewards. Just about everyone has a bank checking and savings account. There is no risk to these investments, but they only pay a few percentage points of interest per year. Only short term money needed for immediate expenses should be invested in them. Certificates of deposit and money market accounts are also commonly owned. They pay a few more percentage points of interest per year and also have very little risk to investment principle. However, they require higher balances and time commitments. Emergency money is often invested this way so it is safe and available if needed.

Potential

There is historically higher potential for long term gain using bonds and stocks for investment. Bonds primarily pay dividends that are like interest but less predictable. The dividend amount tends to be a little higher than CD and money market accounts, but there is more risk involved. Stocks offer the greatest potential for long term investment growth. This makes them the riskiest types of investment. Stock share prices can rise and fall dramatically in the short term. However, historically stocks outperform other types of investments over many years. This is why long term investment for retirement tends to weigh heavily in stocks. Stocks and bonds are most commonly owned by individual investors through mutual funds. They bundle many stocks and bonds together.

Time Frame

Financial advisers recommend investing in a variety of financial securities. This mitigates losses in the event of a sudden dramatic economic downturn while optimizing financial gain in good economic times. The amount of risk in an investment portfolio depends on the time frame of the investor. Young people with many years until retirement can keep a large portion of their money in aggressive stocks since they have time to outlast short term fluctuations in stock prices. However, investors approaching retirement age should shift a majority of their money into conservative bonds, certificates of deposit and money market funds so they are not devastated by a sudden economic collapse.

Warning

Not all business ventures are profitable. In fact, investments sometimes lose money.

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