Investing Money Into A Business – Investment is generally the investment of money over a period of time in a project or business in order to obtain a positive result (that is, a profit greater than the amount of the initial investment). It is the act of allocating resources, usually capital (i.e. money), with the expectation of receiving income, profit or benefit.
One can invest in various types of businesses (directly or indirectly), such as using the money to start a business, or in assets such as buying real estate with the hope of generating rental income and/or selling it later at a higher price.
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Investing is different from saving because money is used, which means that there is some implicit risk that the project in question may fail, causing you to lose money. Investments also differ from speculation in that in the latter, money is not used for one purpose, but bets are placed on short-term price fluctuations.
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Investment is about growing money over time. The expectation of positive returns in the form of income or price increases with statistical significance is a basic premise of investment. The range of assets in which you can invest and make a profit is very wide.
In investing, risk and return are combined; low risk usually means low expected return, while high return usually comes with high risk. On the low-risk end of the spectrum are basic investments such as certificates of deposit (CDs); bonds or fixed income instruments have a higher level of risk, while stocks or shares are considered riskier. Commodities and derivatives are generally considered among the riskiest investments. You can also invest in practical things such as land or real estate, or fine goods such as art and antiques.
The perceived risk and return can vary greatly within the same asset class. For example, a blue chip that trades on the New York Stock Exchange will have a very different risk and return profile than a micro-cap that trades on a smaller exchange.
The income generated by an asset depends on the type of asset. For example, many stocks pay quarterly dividends, while bonds typically pay interest quarterly. Many jurisdictions tax different types of income at different rates.
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In addition to regular income such as dividends or interest, an important component of income is stock price appreciation. Thus, total investment income can be thought of as the sum of income and capital gains. Standard & Poor’s estimates that since 1926, dividends have accounted for nearly one-third of the total returns of S&P 500 stocks, while capital gains have accounted for two-thirds. Thus, capital gains are an important part of investment.
Economists view investing and saving as two sides of the same coin. This is because when you save money by depositing money in a bank, the bank then lends the money to the individual or company who wants to borrow the money to put it to good use. Therefore, your savings are often invested by other people.
Today, investments mainly involve financial instruments that allow individuals or businesses to raise and deploy capital for a firm. These companies then take this capital and use it to grow or make a profit.
Buyers of company shares become equity owners of the company. Owners of a company’s shares are known as its shareholders and can participate in its growth and success through increased share prices and regular dividends paid from the company’s profits.
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Bonds are debt obligations of organizations such as governments, municipalities and corporations. Buying a bond means you retain a portion of the company’s debt and are entitled to periodic interest payments and a return of the bond’s face value upon maturity.
Funds are pooled vehicles managed by investment managers that allow investors to invest in stocks, bonds, preferred shares, commodities, etc. The two most common types of funds are mutual funds and exchange-traded funds or ETFs. Mutual funds are not traded on an exchange and their prices are as of the end of the trading day; ETFs are traded on stock exchanges, just like stocks, and their prices remain the same throughout the trading day. Mutual funds and ETFs may passively track an index such as the S&P 500 or the Dow Jones Industrial Average, or they may be actively managed by a fund manager.
Trusts are another type of investment. Real estate investment trusts (REITs) are among the most popular in this category. REITs invest in commercial or residential properties and regularly pay their investors the rental income generated from those properties. REITs are traded on stock exchanges and thus offer immediate liquidity benefits to their investors.
Alternative investments are an overarching category that includes hedge funds and private equity. Hedge funds are called because they can hedge their investment bets by taking long and short positions in stocks and other investments. Private equity allows companies to raise capital without going public. Hedge funds and private equity funds are generally available only to wealthy investors who are considered “accredited investors” who meet certain income and net worth requirements. However, in recent years, alternative investments have been introduced in a fund format available to retail investors.
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A derivative is a financial instrument whose value is derived from another instrument, such as a stock or index. An options contract is a popular issue 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 typically use leverage, making them a high-risk, high-reward proposition.
Commodities include 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 certain amount of a commodity at a certain price in the future) or ETFs. Commodities can be used to hedge risks or for speculative purposes.
The question of “how to invest” comes down to whether you are a do-it-yourself (DIY) investor or prefer to have your money managed by a professional. Many investors choose to manage their money with a discount account or online brokerage due to the low fees and ease of trading on their platform.
Do-it-yourself investing is sometimes called DIY investing, and it requires some education, skill, time, and the ability to control your emotions. If these qualities describe you poorly, it might be wise to get professional help managing your investments.
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Investors who prefer professional money management usually have a wealth manager to look after their investments. Asset managers typically charge their clients a percentage of their assets under management (AUM) as a fee. Although professional money management is more expensive than managing your own money, these investors are willing to pay for the convenience of delegating research, investment decisions, and trading to experts.
The SEC’s Office of Investor Education and Protection encourages investors to ensure that their investment professionals are licensed and registered.
Some investors prefer to invest based on recommendations from automated financial advisors. Powered by algorithms and artificial intelligence, Roboadvisor collects critical information about investors and their risk profiles to make timely recommendations. With little or no human intervention, robo-advisors offer a low-cost way to invest and services similar to those offered by human investment advisors. As technology advances, robo-advisors can do much more than just select investments. They can also help people design retirement plans and manage trusts and other retirement accounts such as 401(k)s.
Although the concept of investing has been around for centuries, investing in its current form can trace its roots back to the period between the 17th and 18th centuries, when the development of the public market first connected investors with investment opportunities. The Amsterdam Stock Exchange was founded in 1602, and the New York Stock Exchange (NYSE) in 1792.
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The Industrial Revolutions of 1760–1840 and 1860–1914 led to increased wealth as people accumulated investable savings, facilitating the development of a sophisticated banking system. Most of the established banks that have dominated the investment world originated in the 1800s, including Goldman Sachs and J.P. Morgan.
The 20th century saw new horizons in investment theory with the development of new concepts in asset pricing, portfolio theory, and risk management. The second half of the 20th century saw the emergence of a variety of 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 general public, completing the democratization of investing that began more than a century ago.
The bursting of the dot-com bubble—the bubble that created a new generation of millionaires investing in online business and technology stocks—is approaching the 21st century and could set the stage for what’s to come. In 2001, the collapse of Enron took center stage, revealing a complete fraud that led to the bankruptcy of the company and its accounting firm, Arthur Andersen, as well as many of its investors.
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One of the most important events of the 21st century, or history for that matter, is
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