Investing Basics
What is Investing?
Investing is when you put your money into assets (e.g., stocks like Apple or Tesla, bonds like U.S Treasury notes, real estate properties, or commodities like gold or oil) that can grow in value or generate income over time (e.g., Dividends from holding stocks). Unlike leaving money in a savings account, investing allows your money to work for you by participating in the growth of businesses, governments, or other ventures to increase the total value of your initial investment. The main goal of investing is to build long-term wealth, outpace inflation (rising prices that reduce the value of money), and achieve financial freedom (The ability to live the life you want without relying on a paycheck because your investments cover your expenses). However, all investments carry some degree of risk (chance of losing money), which must be weighed against the potential return (profit earned from investing)
Types of Investment
Investments can be grouped into several asset classes, each with different levels of risk and reward
Stocks: Buying a stock means owning a piece of a company (e.g., Amazon, Microsoft, or Netflix). If the company grows, your stock may increase in value, and you may receive dividends, which are company profits shared with shareholders, remember companies are not legally obligated to provide dividends. Stocks have higher potential returns as an overall asset class but also have greater short-term volatility because stock prices fluctuate every minute
Bonds: Bonds are loans made to governments (e.g., U.S. Treasury bonds) or corporations (e.g., Apple corporate bonds). The borrower pays back the principal (original lent amount) plus interest (percentage of principal) over time, Bonds are generally considered a safe investment but have much lower returns
Mutual Funds: Mutual funds pool money from many investors to buy a mix of assets such as stocks and bonds. They are actively managed by professional fund managers who make decisions about which investments to buy or sell. They are priced (given a value) once per day and are ideal for investors who prefer expert management and don't trade frequently.
ETFs (Exchange-Traded Funds): ETFs also pool investors’ money into diversified asset portfolios like Mutual Funds but they are passively manages and usually track a specific market index (like the S&P 500). ETFs can be traded on the stock exchange throughout the day, just like regular shares making them more flexible and cost-efficient than most mutual funds
Real Estate: Investing in property (e.g., rental apartments, commercial buildings, or land) can provide both rental income and long term-capital growth
Commodities: Assets such as gold, oil, or agricultural products can be used to protect against inflation or market downturns, though their prices often fluctuate based on global supply and demand or crises
Risk & Return
Every investment comes with a balance of risk (how likely the investment will lose value) and return (how much you can potentially earn). Generally, investments that offer higher potential returns also carry higher levels of risk. The key to investing is to find the right balance of risk and return based on your personal financial goals. For example stocks can deliver strong-long term growth because their value increase as companies expand and earn more profits. However, stock prices can also fluctuate due to market conditions or business performance. On the other hand, bonds and savings accounts provide more stability but lower returns.
The Power of Time
One of the biggest advantages young investors have is time. Thanks to compound growth, even small investments can grow dramatically over the years. The earlier you start, the more time your money has to multiply.
For example, if you invest $2,000 at a rate of return of 8% per year, you’ll have around $4,300 after 10 years & nearly $9,300 after 20 years without even investing additional money. Starting early gives you a major advantage because time smooths out short-term market changes and fluctuations and allows small investments to grow into significant wealth. Investors who begin young don't need to invest as much later to achieve the same results because their money has been growing for longer.