To call yourself an investor would be an understatement. Investing refers to the purchasing of financial securities with the intent of creating a future gain / return. Simply put, to invest simply means buying an asset or something with the intention of creating an increase in your net worth / asset value over a specified period of time or an appreciation of the asset that is the appreciated value of that asset. It is a common practice to use the word ‘investment’ when it is referring to financial securities and / or investments and / or assets. To better understand what an investment is, let us look at how a stock or shares of stock is used as an example.
An investment can be made by a corporation, a family, or even an individual. It is commonly used as a method for managing funds and / or saving for retirement or future achievement (through stocks, bonds, mutual funds, etc). These types of investments can be used for anything from buying a house to starting a business. The concept of investing refers to the purchasing of an entity with the specific intention of creating / earning a future gain / return.
There are several types of investments such as stock investments, bonds, mutual funds, real estate investments, etc. The purpose of any of these investments is for generating income or profit. A stock market investor is only interested in those stocks or bonds whose price will increase over time (because that is where the earning potential lies). Bond investors look at those bonds whose price and / or the interest rate is expected to increase over time (a more conservative investor may look at bonds whose price and / or the interest rate is expected to fall over time).
Another important aspect of the investment process is understanding the tax implications. For instance, a mutual fund investment can be made with a tax consideration in mind. By paying taxes on your gains, you will usually reduce the taxable amount on your investment. On the other hand, if you use up all of your savings and invest it all in stocks, bonds, and real estate, you may still end up with taxable income because most of the tax-deferred growth on the investment is realized during the period in which you hold the property.
An investor’s risk tolerance affects the type of investment, he or she may select. This is the extent to which an investor will allow his or her investments to lose value. All investments come with risks; the better managed the investment, the lower the risk. High risk tolerance means that an investor is willing to lose a greater amount of the investment, but is able to cover this loss in case of a complete loss.
Real estate investment securities include mortgage-backed securities, commercial mortgage-backed securities, credit mortgage-backed securities, deed-in-lieu of mortgage-backed securities, mortgage-interline and note mortgage-backed securities, commercial paper mortgage-backed securities, and government mortgage-backed securities. Bonds are another popular area for investment portfolios. A bond issue will usually yield a fixed rate interest rate. However, bonds are prone to inflation and have a gestation period as well as different payment plans.
The return potential of any given investment depends on many factors, including the interest rates, the risk associated with that asset, duration of time until maturity, risk appetite of an individual, and the investment strategy used to generate income from that asset. An investor may buy an asset and hold onto it, potentially earning interest that offsets any initial expense. Alternatively, an investor may sell an asset, hopefully at a higher price than the original cost. He or she may also borrow from or invest in a commercial bank. However, an investor may not be able to get enough capital from one of these institutions to support his or her other investment activities. The result is a lower return on the asset than originally expected.
Another way of investing is through buying and selling mutual funds. Mutual funds are collections of investments that track the movement of various assets, such as stocks, bonds, or money market funds. Some mutual funds are exchange traded funds. Investors can buy mutual funds and hold on to them until they mature, hopefully earning higher returns on their investment than on their stock, bond, or money market fund investments. However, mutual funds incur expenses on a regular basis, such as maintenance and brokerage fees, which may offset some of the potential benefits of investing in a particular fund. Other ways of generating income include real estate investment, commodity trading, commodities, foreign exchange, and ownership of company shares.