2) Investing 101: What is Investing?

by · August 23, 2010

Investing: The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.

Putting Your Money To Work

Everyone wants to make more money. One solution to earning more money is to work more. However, there is a limit to how many hours a day we can work. Working too much means you don’t have the opportunity for rest, or to enjoy what you are presumably working for. The beauty of investing is that you put your money to work for you, rather than the other way around. Think of it as a supplemental way of earning an income aside from the income derived from your job. Children are taught the value of saving money in a piggy bank; as adults we get a regular 40-hour a week job and deposit the extra money in the bank. Depositing money into a savings account is a good start, with a major limitation: it pretty much just sits there.

Investing allows is to be more financially productive and earn more without having to literally work the extra hours. Imagine that while you are working, mowing your lawn, sleeping, reading the newspaper or even having fun with your friends, you are also making money.  Investing maximizes your earning potential whether or not you receive a raise, work overtime, get a promotion or a job with a higher salary.

Among the best ways of investing money is putting it into stocks, bonds, mutual funds, real estate, or starting your own business. People often call these investment options “investment vehicles.” In layman’s terms, an investment vehicle is a way to invest. Each of these investment vehicles has its own advantages and disadvantages (which will be discussed later in this tutorial). Wherever you choose to invest your money, the goal is to let it work to your advantage so that it earns you maximal profit. While a simple idea, it’s the most important concept for you to understand.

What Investing Is Not

“You have to spend money to earn money.”

While this old adage is true, don’t confuse investing with gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. There may be similarities to the concept of investing and gambling: For example, buying a stock based on a “hot tip” you heard at the local bar is essentially the same as placing a bet at the casino. This is where a lot of confusion comes in. The “hot tip” can be called a gamble, but you have to ask yourself this – was your source a reliable one? It would be unwise not to verify the information first. On the other hand, if you did a little research, that “hot tip” might actually be earning you more money had you not considered it, or it could be the other way around had you acted immediately without basic research.

True investing doesn’t happen without some action on your part. A “real” investor does not simply jump on every chance they get without thinking. First and foremost, they must perform a thorough analysis and commit capital only when there is a reasonable expectation of profit. While there is an element risk involved, and no guarantees, investing is more than just hoping Lady Luck is on your side.

Why Bother Investing?

Nobody can deny that many people want more money: more money can increase your personal freedom, sense of security and ability to afford the things you want in life. Investing is becoming more common these day, as many people have realized that working the same job for 30 years is not enough. Still, many people are not very comfortable with the idea of investing. The fear of not getting that nice fat pension once they retire holds them back.

If you’ve been watching the news at all recently, you are aware of governments worldwide tightening their belts, including retirement programs such as social security. Increasingly,the responsibility of planning for retirement is shifting away from the state and towards the invidividual. There is great uncertainty as to the solvency of many old-age pension programs over the next 20, 30 or 50 years. By planning ahead through investments, you can ensure financial stability in the near future and during your retirement.

By this time you should already have a general concept of what investing is and why you should engage in it. Now it is time to learn about how investing lets you take advantage of one of the miracles of mathematics: compound interest.

Next Section: The Concept of Compounding