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What is Investing and Why Does it Matter

When you invest, you are committing money or another resource in the expectation of some future benefit. A college education, for example, can be considered an investment because you invest your time (a resource) in hopes of earning a degree and a good job after graduating (the future benefit).

In a financial sense, investing means that an individual commits money to a financial asset, or security, such as a stock or bond, in hopes of receiving even more money later. The potential of receiving more money later is the reason why people invest in the first place.

  • How Do Investments Earn Money
  • How to Start Investing

How Do Investments Earn Money?

Most investments earn an investor money through appreciation, interest payments, or dividends. Appreciation means that the value of an asset has increased. If you purchased a collectible item for $100 and five years later it was worth $500, then the collectible appreciated in value. Securities can do the same — a stock issued by a company can increase in value over a number of years.

You’ve likely paid interest payments on a loan you’ve taken out, whether that was a student loan or mortgage. These interest payments you paid the lender were how the lender earned money on that loan (or investment). One type of security that issues interest payments to its investors is a bond. When you buy a bond, you are lending money to the government or a corporation, which promises to pay you back and make interest payments on the amount you lent.

Dividends are also issued as a payment to investors, but they are made by companies whose stock or equity you own. Public companies issue stock to raise money for business activities, letting investors purchase these stocks. If you own stock in a company, that company may also issue dividend payments to you as a way to share its profits with its investors. This is on top of any appreciation in the value of the stock.

How to Start Investing

The advent of online investing has made it easy to start investing. Many online brokerages don’t require a minimum amount to start, so you could start with as little as $50. Some types of brokers, like full-service brokers and Robo-advisors, will even select your investments for a truly hands-off approach. Be aware that all brokers charge a variety of fees for using their services; you should understand them before signing up.

You also need to understand what type of account you will open, how much you have to invest, and what you will invest in. Most new investors would be wise to invest in low-cost index mutual funds and ETFs rather than picking specific stocks or bonds.

This is because funds allow you to hold a piece of tens or hundreds of different securities and many are well diversified and affordable. With whatever strategy you choose, make sure you do your research and understand all of the risks involved.