What is investing?
What is investing? Investing is buying something with the expectation that it will be worth more later on. This could be, for example, a share in a company. However, there are many more possibilities and forms of investing than you would initially think.
What is the purpose of investing?
The aim of investing is, of course, to make money. In the traditional form of investing, you would make money when the price of a stock increases. When you hold on to a stock for a longer period of time, you can achieve a positive result.
Nowadays, it is also possible to make money when prices fall. This possibility is, of course, very attractive when the economy is not doing so well. When you estimate the price of a stock will fall, you can open a short position.
What can you invest in?
When you think about the question of what investing is, you also come to the question of what you can invest in. A better question might be what you cannot invest in. After all, it is possible to invest in almost anything via the internet. Think of pigs, but also, for example, art. Nevertheless, there are a few important categories:
- Shares: you then trade in the stock market value of a company.
- Bonds: you trade loans issued by companies or governments.
- Raw materials: you can invest in gold and silver among others.
- Forex: here you trade in currencies such as the pound against the dollar.
- Options: you buy the option to buy or sell a stock against a set price.
- Derivatives: more complicated constructions with which you can also open short positions.
- Cryptocurrencies: you can trade in digital currencies like the Bitcoin.
How can you invest well?
Investing is more than just gambling. Yet you can never predict the stock market with certainty. By practising, however, you can become handy at it. Especially in the short term certain patterns can be analysed and predicted, which makes it possible to earn a living as a professional trader. In the long term, the core data of the company becomes important. It is then important to do a more extensive analysis of the company.
Please note that the price of a security can never be determined with certainty: therefore, only invest with money that you do not immediately need.
5 reasons to invest
- Investing can give you a better result than saving.
- With investing, you can also bet on a falling price.
- You can decide for yourself how much you want to invest.
- You can try investing for free with a demo.
- Investing is exciting and educational!
Why do people invest?
We now know what investment is and what you can invest in. But why do people decide to invest? It is well known that investing involves risks, and people like to see money grow, but preferably at a limited risk. Yet many people decide to invest in the end. Are they not afraid of losing their money?
Probably, however, the alternative is not very attractive. Under the influence of inflation and low savings interest rates, putting your money on the bank yields a negative return. This while investments show good returns in the longer term. It is therefore not surprising that more and more people are trying to invest. Some people do this themselves and others call in an investment fund or adviser.
Investing yourself?
Now that you know what investing means and why people do it, you can determine whether it is also for you. Do you dare to trade the stock markets? Your risk might be higher, but your potential return is a lot higher as well…
If you want to invest yourself, you need an account with an online broker. A broker is a party that makes it possible to trade in, for example, shares. We have made a clear overview of the best brokers. Use the button below to immediately compare the best brokers with each other:
Specific questions about investing
You can invest in all kinds of securities: in this part of the article we go into the different investment possibilities in more detail.
When you invest in stocks, you actually buy a part of a company. Companies issue stocks to attract money without having to borrow it. They then sell part of the ownership of the company: when you buy stocks, you become the owner of a tiny part of the company.
There are two ways in which you can make money when you invest in shares:
- Price gain: you make a price gain when the share price rises.
- Dividend: shares sometimes distribute part of the profits in the form of dividends.
On average, you can achieve an annual return of seven to eight percent on investments in stocks. However, this is not a guarantee: if you select a strong share, you can sometimes achieve tens of per cent return, whereas with a weak share, you can lose a lot of money.
Do you want to know how investing in stocks works in more detail? Then read our guide to buying and selling shares right away:
What is investing in bonds?
Another form of investment is investment in bonds. When you invest in bonds, you invest in loans issued by companies or governments. There are two ways to make money with bonds:
- Price gain: the price of a bond can increase.
- Interest: you receive interest on your bond on a yearly basis.
Investing in bonds pays off particularly well when interest rates are high. The annual return on your bond will then be high. Use the button below for more information about investing in bonds:
What is investing in investment funds?
A popular way of investing is to invest in an investment fund. A mutual fund invests your money on your behalf. So, you do not have to decide for yourself how your money is invested. There are two types of investment funds:
- Index funds: these funds follow an index and are also called passive.
- Active investment funds: these funds actively try to beat the market.
Active investment funds rarely succeed in beating the market. They still charge higher transaction costs, which often makes it unattractive to invest in these funds. For most people, it is therefore wiser to invest in an index fund as well. You can read more about index funds in our article on the subject:
What is investing in CFDs?
Another, modern method of investing is CFD trading. When you invest in CFDs, you are investing on changes in the price of the underlying asset. With CFD’s you don’t buy a share: instead, you only buy a contract on the rise or fall of a stock. CFDs allow you to speculate on small price changes and to respond to both rising and falling markets. Do you want to know more about investing in CFDs? Read our guide on the subject:
What is investing in real estate?
When you have a little more capital available, it can also be attractive to invest in real estate. Real estate comes in many shapes and sizes: you can invest in houses but also in office buildings. With real estate, you can achieve a positive return in two ways:
- Price gain: the price of the property may increase in value.
- Rent: you can rent out your property for a monthly income.
Investments in real estate are considered safer than investments in shares. Real estate, especially in a good location, does not simply lose its value. Do you want to know how to invest in real estate yourself? Then read our special on the subject:
What is investing in options?
Investing in options can be interesting for the smart, active investor. Options give you the right to buy or sell a share at a certain price. If the price then moves in the right direction, you can achieve a good return.
It is also possible to write options: you will receive a premium for this. Writing options can be very risky. Would you like to know more about investing in options? Then read our article on this subject:
How can you make money on the stock exchange?
Anyone can make money with the stock market! This is usually done by making a price gain. Through the interplay of supply and demand you see that stock prices change regularly. Do you want to know how you can make money on the stock market yourself? Then read our article on this subject right away:
What is the difference between investing and speculating?
Speculation is really focused on the short term: you then hold a position for hours or days with the aim of achieving a quick price gain. When investing, the emphasis is often on positions that are held for a longer period of time.
What are important basic rules for investing?
When investing, it is important to remember that risk and return are inextricably linked. Taking higher risks is therefore rewarded: but you have to make sure that you don’t lose your entire capital by making a stupid mistake. It is also important to remember that the chance of success with investment increases when your investment horizon is longer. You will then have more time to wait for a recovery when the prices are against you for a while.
What is an investment?
With an investment, you put money into a security like a stock or a bond. The purpose of an investment is to gain a financial advantage in the future. You actually exchange your certain capital for an uncertain income in the future.
We often do not call savers investors: yet both groups actually fall under the same heading. After all, you convert money into a possible future gain, and you run a risk in doing so. You also run a small, but negligible risk on your savings account. The bank may go bankrupt, and you also run an inflation risk: your money will then be worth less because the prices of products in a country rise.
What types of investors exist?
There are different types of investor on the stock exchanges. The private investor is an investor who invests for himself. Institutional investors are large bodies that manage large quantities of assets: examples include pension funds and insurance companies. Institutional investors have a major influence on stock market prices. Companies are also active on the market and use derivatives to hedge their risks.
What type of investors are there?
Economic investors: the economic investor or trader mainly looks at short-term macro-economic expectations. When the economy is doing well, they buy additional shares.
Automatic investors: the automatic investors automatically buy baskets of stocks and bonds using an index fund.
Technical investors: technical investors use technical analysis to predict future prices.
Growth investors: growth investors invest in equities on the basis of expected growth in the future. Promising, but still loss-making companies are interesting to the growth investor.
Value investors: value investors invest in companies by looking at how the company is performing now. A well-known value investor is Warren Buffett.
Alternative investment: there are also many alternative forms of investment. You can invest in almost anything, from wine to art and from wood to ocean-going vessels.
What are the advantages of investing?
High expected return: the average return on stocks is between 7 and 8 percent. That is much higher than the return on your savings!
Return over return: your capital can grow exponentially because you also receive a new return over your return.
Dividend: you often receive a dividend on stocks. By investing in stocks you can build up a nice income.
Tradable: when you trade on the stock exchange, you can sell the investments you buy.
What are the disadvantages of investing?
Risks: investing involves the necessary risks. If you are unlucky, a company can even go bankrupt: you then lose your entire investment.
Knowledge & time: good investment takes knowledge & time. Unfortunately, becoming rich without doing anything is not possible.
Can you lose all your money by investing?
If you take excessive risks, you can lose all your money investing. This can happen when you put all your money into one company or when you use risky derivatives. If your investments are sufficiently spread over different categories, the chance of losing the full amount on your investment account is fortunately minimal.
What is investing now?
To the question ‘what is investing’ we can give a simple answer: buying and/or selling securities to make money. Investing is an interesting way to get a higher return on your savings. Nowadays, it is possible for everyone to invest. However, it is important to draw up a good plan before you jump into the deep end.
Auteur
Over Alex Mostert
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.
