When you invest, your money makes more money. Besides the obvious benefit of freeing up your time to do more of the things that you like to do, investing does something that you can't do on your own, regardless of how talented you might be. Many financial markets allow you to leverage your investment. The result is that you earn far more than you could from any amount of industrious labor.
What's more, if you're particularly good at investments, say, buying and selling foreign currency banknotes at a currency exchange website like Treasury Vault, then you don't have to work full time for a living. You can simply make trades a few times a week or month.
When you invest, you strive to own assets, resources that you own that you expect will increase in value. You place these assets into a portfolio, which is a figurative way of describing your total investments. This portfolio will consist of holdings, which are specific assets, and asset classes, which are assets grouped by similar characteristics, like stocks or bonds.
2 Primary Investment Categories
Although this is a bit of a simplification, you can chunk investments into two specific categories: Investments where you own assets and investments where you lend money.
Let's take a closer look at each of these two types of investments so that you can identify the types of investments that suit your interests.
When you own an asset, you expect it to increase in value. Your investments might consist of stocks, valuable objects, real estate, and businesses.
A stock is an equity, share, or stake in a public company. As a partial owner, you enjoy a percentage of the profits the company makes. Stocks should make a large part of your portfolio.
A valuable object could be art, precious metals, jewelry, collectibles, and so on. As these increase in value over time, you can make a huge profit by selling them. If, for instance, you happened to own Onement painted by Barnett Newman, it would be worth $43.8 million.
When you own real estate, you can resell your property for a large payoff or rent it out for a continuous stream of income.
When you own a business, you could earn a profit from sales and then sell the business once you've made it into a valuable asset. You can, of course, decide to work in the business to grow it…or you could simply own the business and hire the right people to manage it.
As a lender, you function like a bank. You are essentially buying a debt with the hope that it will be repaid. Your portfolio might consist of savings accounts, CDs, TIPs, or Bonds.
When you open a savings account, you are lending your money out to a bank. Since the interest rate is usually below the rate of inflation, this is not a recommended investment strategy. Usually, investors use savings accounts as a place to park their money rather than as a wealth-building strategy.
A certificate of deposit (CD) is a promissory note a bank gives you for your money. It's similar to a savings account, with some differences. You forfeit the right to withdraw your money when you like. Instead, you must leave it in the account for a specified period of time. In return for committing to leave your money untouched, the bank will give you a higher interest rate than a regular savings account.
A treasury-inflation protection security (TIPS) are US Treasury-backed bonds. The purpose of this investment is to serve as a hedge against inflation. Over time, your TIPS investment will mature in value. When you do withdraw your money, you will get your principal back, as well as interest. The key benefit is that both will be indexed for inflation.
A bond is a loan that you give a corporation or the government. You will be paid back over a specified period of time at a fixed interest rate. After stocks, this is the next most important asset to add to your portfolio.
In closing, it's always a good idea to have a reason for your investment. Do you just want to supplement your income? Do you want to create money for a comfortable retirement? Do you want to quit working altogether? Your purpose for investing will determine how you go about building your portfolio.