What is investment? How can you start investing?

Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains. In a larger sense, investing can also be about spending time or money to improve one's own life or the lives of others. But in the world of finance, investment is the purchase of securities, real estate and other items of value in pursuit of capital gains or income.

How does investing work?

In the most straightforward sense, investing works when you buy an asset at a lower price and sell it at a higher price. Such return on your investment is called capital gain. Earning a return by selling assets for a profit -- or realizing your capital gains -- is one way to invest money.

An investment gains in value when you buy and sell it, also known as appreciation.

A share of stock can appreciate when a company creates a hot new product that boosts sales, increases the company's revenue and increases the value of the stock on the market.

A corporate bond may appreciate when it pays 5% annual interest and the same company issues new bonds that offer only 4% interest, making yours more desirable.

A commodity like gold may appreciate as the US dollar loses value, which increases demand for gold.

A home or condo may appreciate in value because you have renovated the property, or because the neighborhood has become more desirable for young families with children.

In addition to capital gains and gains from appreciation, investing works when you buy and hold an income-generating asset. Instead of obtaining a capital gain by selling an asset, the goal of income investing is to buy assets that generate cash flow over time and hold onto them without selling.

For example, many stocks pay dividends. Instead of buying and selling shares, dividend investors hold stocks and profit from dividend income.

What are the basic types of investments?

There are four main asset classes in which people can invest with the expectation of enjoying appreciation: stocks, bonds, commodities and real estate. In addition to these basic securities, there are funds such as mutual funds and exchange-traded funds (ETFs) that buy various combinations of these assets. When you exclude these funds, you are investing hundreds or thousands of personal assets.

shares

Companies sell stock to raise money to conduct their business. Buying shares of stock gives you partial ownership of the company and allows you to share in its profits (and losses). Some stocks also pay dividends, which are small regular payments to companies' profits.

Because there is no guaranteed return and individual companies can go out of business, stocks come with more risk than some other investments.

bond

Bonds allow investors to "become a bank." When companies and countries need to raise capital, they borrow money from investors by issuing debt, called bonds.

When you invest in bonds, you are lending money to the issuer for a specified period of time. In exchange for your loan, the issuer will pay you a fixed rate of return as well as the money you initially owed to them.

Because of their guaranteed, fixed rates of return, bonds are also known as fixed income investments and are generally less risky than stocks. However, not all bonds are "safe" investments. Some bonds are issued by companies with poor credit ratings, which means they may have a higher chance of defaulting on repayment.

Goods

Commodities are agricultural products, energy products and metals, including precious metals. These assets are generally raw materials used by the industry, and their prices depend on market demand. For example, if the supply of wheat is affected by floods, the price of wheat may increase due to shortage.

Buying "material" goods means possessing quantities of oil, wheat and gold. As you can imagine, it is not the case that most people invest in commodities. Instead, investors buy commodities using futures and options contracts. You can invest in commodities through buying other securities, such as ETFs or shares of companies that produce the commodities.

Commodities can be relatively high-risk investments. Futures and options investing often involves trading with money you borrowed, increasing your potential for losses. So buying a commodity is usually for more experienced investors.

real estate

You can invest in real estate by buying a house, building or piece of land. Real estate investments vary in their level of risk and are subject to a variety of factors, such as economic cycles.

S, crime rates, public school ratings, and local government stability.

People looking to invest in real estate without owning or managing real estate may directly consider buying shares of a real estate investment trust (REIT). REITs are companies that use real estate to generate income for shareholders. Traditionally, they pay higher dividends than many other assets such as stocks.

Mutual Funds and ETFs

Mutual funds and ETFs invest in stocks, bonds and commodities following a specific strategy. Funds like ETFs and mutual funds let you invest in hundreds or even thousands of assets at once when you buy their shares. This easy diversification makes mutual funds and ETFs generally less risky than individual investments.

While mutual funds and ETFs are both types of funds, they operate in slightly different ways. Mutual funds buy and sell a wide range of assets and are often actively managed, meaning that an investment professional chooses what they invest in. Mutual funds are often trying to outperform the benchmark index. This proactive, practical management means that mutual funds are generally more expensive to invest in than ETFs.

ETFs also hold hundreds or even thousands of individual securities. However, rather than trying to outperform a particular index, ETFs typically try to mimic the performance of a particular benchmark index. This passive approach to investing means that the return on your investment will probably never exceed average benchmark performance.

Because they are not actively managed, ETFs typically cost less to invest than mutual funds. And historically, very few actively managed mutual funds have outperformed their benchmark indexes and passive funds over the long term.

How to think about risk and investment

Different investments come with different levels of risk. Taking on more risk means your investment returns can rise faster—but it also means you're more likely to lose money. Conversely, lower risk means you can make profits more slowly, but your investment is safer.

Determining how much risk to take while investing is called assessing your risk tolerance. If you are comfortable with more short-term fluctuations in your investment value for the potential for higher long-term returns, you probably have a higher risk tolerance. On the other hand, you may feel better with a slower, more moderate return rate with less volatility. In that case, you may have a low risk tolerance.

In general, financial advisors recommend that you take more risk when you are investing for a long-term goal, such as when investing for a young retirement. When you have years and decades before you need your money, you are generally in a better position to recover from a decline in your investment value.

For example, while the S&P 500 has seen many short-term lows, including recessions and depressions, it has still provided an average annual return of about 10% over the past 100 years. But if you needed your money during one of these downturns, you would be at a loss. That's why it's important to consider your timeline and overall financial situation while investing.

Risk and Diversification

Whatever your risk tolerance, one of the best ways to manage risk is to own a variety of different investments. You've probably heard the saying "don't put all your eggs in one basket." In the investing world, this concept is called diversification, and the right level of diversification makes for a successful, well-rounded investment portfolio.

Here's how it plays out: For example, if the stock market is performing well and rising rapidly, it's possible that some parts of the bond market could decline. If your investments were concentrated in bonds, you would be losing money—but if you were properly diversified in bond and stock investments, you could limit your losses.

By owning a range of investments in different companies and different asset classes, you can buffer losses in one sector with gains in another. It keeps your portfolio growing steadily and safely over time.

How can I start investing?

Investing is relatively simple to get started with, and you don't even need a ton of cash. Here's what kind of beginner investment account is right for you:

If you have a little money to start an account, but don't want the burden of picking and choosing investments, you can start investing with a robo-advisor. These are automated investment platforms that help you invest your money in a pre-made, diversified portfolio, customized to your risk tolerance and financial goals.

If you prefer to do practical research and choose your individual investments, you may prefer to open an online brokerage account and choose your own investments. If you are a beginner, remember the easy diversification offered by mutual funds and ETFs.

if you any Talk to a financial advisor working with new investors if you prefer a practical approach to investing with additional help from a professional. With a Financial Advisor, you can build a relationship with a trusted professional who understands your Goa

ls and can help you choose and manage your investments over time.

No matter how you start investing, keep in mind that investing is a long-term endeavor and you will reap the greatest returns by investing consistently over time. This means sticking with the investment strategy whether the market is up or down.

Start investing early, keep investing regularly

"Successful investors typically build wealth systematically through regular investments, such as payroll deductions at work or automatic deductions from a checking or savings account," says Jess Emery, spokesperson for Vanguard Funds.

Investing regularly helps you take advantage of the natural ups and downs of the market. When you invest a similar amount over time, you buy fewer shares when prices are high and more shares when prices are low. Over time, this can help you pay less than the average per share, a principle known as dollar-cost averaging. And "[dollar-cost averaging] is not likely to work if you are unwilling to continue investing during a downturn in the markets," Emery says.

You should also remember that no investment is guaranteed, but calculated risk can pay off.

"Over the past 30 years, investing in the S&P 500 would have yielded 10 per cent annualized returns," says Sandy Brager, managing director of wealth management firm Aspirant. "Losing the 25 best single days during that period would only have yielded a 5% annualized return." This is a reminder not to sell your investments in a panic when the market is down. It's incredibly difficult to predict when a stock price will rise again, and some of the stock market's biggest days have been followed by days of big losses.

Good investing starts with investing in yourself. Learn about the types of retirement accounts. Pay off your emergency savings. Create a strategy for paying off your student loan debt. And with those key financial tools in place, you can start investing with confidence—put the money you have today to secure your future.