Investing definition: what does investing mean?
Before you start investing, it is a good idea to get to know the subject well. One way of doing this is by reading the definition of investing. We provide this definition in this article. On this page, we also list a few investment products and give you some general tips to get started with investing.
What is the definition of investment?
An investment is an action in which money is laid down for a shorter or longer period, with the aim of achieving financial gain in the future. When you invest money, you put money into a specific investment product in the hope of achieving a positive return in the future. This could be a share, bond or ETF among others.
Return on investment
An important part of investing is the return you get from it. The type of return you obtain depends on the investment product you invest in. Stocks pay dividends, for example, while bonds pay out interest. The prices of investment products can also fluctuate: when the price of a share rises, you can also make a profit.
The return and risk are inextricably linked. As an investor, you receive a reward for the risks you take. More risky investments often provide a higher potential reward, but at the same time, you can easily lose money with them.
What types of investments are there?
The definition of investment is quite broad and can be made more specific by looking at specific investment products. In this part of the article, we look at the best-known investment products you can invest in.
When you buy shares, you become a co-owner of a company. Some companies distribute part of the profits in the form of dividends. If you buy stocks at the right time, you can also make a gain on the stock price. Do you want to know more about the definition of shares? Then read our extensive article What are shares?
Bonds are also well-known investment products. With a bond, you lend money to a company or government in exchange for fixed interest payments. With a bond, you own a part of the issued debt of a certain party. At the end of the term, you as bondholder receive the full amount of the investment back. In the article what are bonds, we discuss in more detail how investing in bonds works:
Not everyone likes to select investment products themselves. If you fall within this group, it may be interesting to invest in an investment fund. An investment fund is a party that invests the money of you and thousands of other investors in a combination of investment products. Do you want to know more about investment funds? Then read our article What are investment funds?
You can also choose to invest by using derivatives. There are all kinds of derivatives: for example, options and CFDs. With a derivative, you can often achieve a high return in a short period of time. However, the risks on derivatives are also much higher than the risks on, for example, stocks. Do you want to know how investing in derivatives works exactly? Then read our article What are derivatives?:
Investments in commodities are also becoming increasingly popular. Raw materials such as gold, silver and oil are very popular and scarce worldwide, which means that their prices can rise quickly. You can trade commodities via a fund or by buying them directly physically on the stock exchange. Use the button below to read more about investing in commodities:
The definition of investment is broad: you can invest in many investment products. Some people invest in art or stamps, for example. However, it is advisable to invest as much as possible in things you understand. That way, you avoid losing money by making unwise decisions.
Different investment styles
There are different investment styles and strategies: it is therefore not surprising that the definition of investment is so broad.
For example, there is a clear difference between active and passive investing. When you invest actively, you try to beat the market as much as possible. You select stocks of companies of which you expect a large growth. Passive investors do not focus on beating the market and try to follow it. For novice investors, passive investing is often the best choice.
There is also a big difference between investing for growth or investing for value. Investors who invest for growth select stocks that have great potential to grow in the future. These are, for example, technology stocks that have yet to prove themselves. Other people invest for value and look for shares of companies that have been around for a long time but are trading just below their intrinsic value.
Do you want to learn how to invest? Take a look at our overview of investment strategies:
What is the difference between investing and speculating?
People sometimes wrongly confuse investing and speculating. However, there are clear differences:
- Investing is more long-term oriented, while speculating is short-term oriented.
- People who speculate take greater risks while people who invest try to limit their risks.
- People who invest keep their positions open for a long time, while people who speculate often open and close positions quickly.
- When investing, a large part of the return comes from dividend payments, while when speculating, price increases are the main source of income.
As you can see, the definition of investing is very different from that of speculating. Do you want to know more about speculating on the stock market? Then read our article on speculation:
How high is your yield?
The definition of your return is determined by your price gains and dividend payments. If the price of a stock rises from $100 to $120 then you make a $20 gain. If the company pays out $5 in profit that year than the dividend is $5 pounds.
Your return is then $20 + $5 = $25. Over the value of your initial investment of $100, you will then earn a 25% return.
What types of investors are there?
There are many parties that invest. The best known are:
Private investors are people like you and me who decide to invest part of their savings. With the rise of the internet, anyone can invest nowadays. Do you want to know where you can invest best? Use the button below to directly compare the best brokers:
Institutional investors are institutions that manage large assets: for example, pension funds or insurance companies. These parties often invest large amounts of money, which can cause share prices to suddenly rise or fall sharply.
Companies are also active on the investment market. They use the stock market to buy back their stocks or to hedge their risks as much as possible.
Starting with investing: 3 general tips
Do you want to start investing soon, and make your assets work for you? In that case, it is wise to prepare yourself well for this big step. We would like to give you three general tips that novice investors can use to prepare for their first investments.
Tip 1: Decide what kind of investor you are
There are many types of investor. There are investors who prefer to make as much profit as possible and do not mind taking a bit more risk, but there are also cautious investors. Before you start investing, it is good to determine exactly what kind of investor you are. What kind of investor you are, determines what investment strategy suits you best.
Tip 2: Find a good strategy
The best investors always trade according to a certain strategy. Before you actually add shares, options or other investment products to your portfolio, it is good to determine your strategy. You can search for various strategies, and you determine for yourself which strategy suits you best.
Tip 3: Determine your goal
Finally, you determine the purpose of your investment. For example, how much money do you want to earn and within what time frame? Your objective also influences the optimal investment method. That is why it is important to determine your goal before you actually start investing.