What is an Investment?


6 mins read March 22, 2023

In this article, we will break down what investment is, explore different types of investments, and provide practical tips on how to start investing as a beginner. Whether you're looking to build wealth or secure your financial future, understanding what investment means is crucial to achieving your goals.

What is an investment?

An investment is the practice of putting your funds into an asset with the expectation of making a profit. This means purchasing an item with the expectation that your money will grow short-term or long-term. 

Additionally, investing involves placing your money in an item of value, with the expectation that it will grow in value and bring in more money with time. In gambling, you are not placing your money in an asset because of growth potential, increasing the risk of loss.

Additionally, investing involves placing your money in an item of value, with the expectation that it will grow in value and bring in more money with time. In gambling, you are not placing your money in an asset because of growth potential, increasing the risk of loss.

Investment Vs Saving: What is the difference? 

Investing and saving are both integral steps in planning for your future and necessary for your financial security.  However, while savings and investments involve putting money aside, their growth potential and risks differ.  While saving your money in the bank, there’s almost no risk of losing your funds; however, investment is high risk and could result in losses. 

Also, savings barely accumulate value as the interest rate gains are minimal. Additionally, with inflation, your money tends to lose value over time. However, investment offers the possibility of huge returns and profits. Furthermore, savings remain liquid (in cash); however, investments take different forms; they can be an asset like gold, a share in a company or even property. 

How do investments work

Investments essentially allow you to grow your funds over time. You can either earn profits in investments either through appreciation or income generation. Asset appreciation occurs when you buy an asset like gold, crypto or property and then sell them for a profit when prices increase. 

Alternatively, you can also earn income via your investment, e.g. dividends from stocks. You can buy and lease a house or rent it out and profit from the rent paid. 

Types of Investments

There are several types of investments which are broadly classified as fixed income and variable income investments. Fixed income refers to assets that allow you to earn an income, such as bonds, and they have a fixed percentage of interest.  Variable income investments such as real estate and crypto do not have a fixed return annually, and their value appreciates over time. 

Here are some examples of investments: 

  1. Mutual Funds
    A mutual fund is an investment where people pool their money to buy a collection of stocks, bonds, or other securities. Each person owns a portion of the fund, which is managed by professionals who make investment decisions on behalf of the group. The fund's value goes up or down based on the performance of its investments.
  2. Bonds
    Bonds are a form of loan issued by businesses and governments. Bonds are a type of financial instrument that represents a loan made by an investor to an issuer. In exchange for the loan, the issuer promises to pay the investor a fixed or variable interest rate over a specified period and repay the principal or face value when it matures.
  3. Cryptocurrencies
    Cryptocurrencies are digital currencies designed to operate as a medium of exchange or store of value. Cryptocurrencies like bitcoin can be traded without brokers, and investors earn profits from the price fluctuations- buying low and selling high. 
  4. Real estate: 
    Real estate involves purchasing land or property and earning profits from either leasing, renting or selling the property. In terms of sales, you profit from the asset appreciation and sell at a profit. 
  5. Collectables, commodities, and other alternative investments
    Investments extend beyond bonds, stocks, crypto, and real estate and include purchasing items of worth like gold, art, NFTs, precious metals, oils, grain and more. Investors can buy antiques like vases and art and sell them later at a higher price.

How To Start Investing

Investing is a great way to build wealth and secure your financial future. Fortunately, you do not have to have significant capital to build an investment portfolio. In fact, experts recommend that you start by investing what you can afford to lose; therefore, you don’t need a huge capital to invest.  Here are some things to consider before you begin investing.

  1. Draw a financial road map: You should clearly understand your financial goals before investing. Determine what you want to achieve with your investments, whether saving for retirement or buying a house, and this will determine the best investments for you.
  2. Evaluate your comfort level with risk: All investments carry risk, and it's essential to determine your tolerance for it before deciding on your investment strategy.
  3. Do Your Own Research (DYOR): It's essential to research and not rely solely on the advice of friends or family members before making any investment move. 
  4. Consider Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves investing a fixed amount of money at regular intervals, regardless of the market's ups and downs. This approach can help you minimise risks. 
  5. Diversify your portfolio: By spreading your investments across different assets, such as stocks, crypto, and real estate, you can help mitigate risk and potentially increase returns. 
  6. Create and maintain an emergency fund: No matter how much you invest, having a rainy-day fund is essential. This emergency fund should be easily accessible and cover at least three to six months of living expenses. That way, you won't be forced to sell your investments prematurely to cover your needs. 

With these tips, you can make informed decisions and create a solid investment plan that suits your goals.

Conclusion: Why Is Investing Important?

Investment is essential to your journey to financial freedom and offers several benefits. Here are a few reasons why you should consider investing: 

  1. Wealth creation: Investment is a crucial way to grow wealth over time. Investing in assets such as stocks, crypto, and real estate can earn you a profit to meet your expenses and grow your wealth. 
  2. Retirement planning: Investment is a critical component of retirement planning. While savings is a great start, investments supplement your earnings to ensure that you have enough funds to support your lifestyle after retirement.
  3. Inflation hedge: Investment can also act as a hedge against inflation as the profit you gain from investing your funds surpasses what you lose with inflation, thereby preserving the value of your money.

Frequently Asked Questions (FAQs) of Investment

  1. Why invest when you can save money with zero risk
    Saving a portion of your monthly income can help you build a reserve fund. However, this may not sufficiently cover unexpected expenses that drain even the most robust savings. Investment offers a way to supplement your savings and grow your wealth. 
    It's crucial to note that investing always comes with a level of risk. While you could earn significant returns on your investments, there is no guarantee that you will make a profit. Therefore, it is essential to assess your risks, research and invest accordingly.
  2. How to calculate the success of an investment 
    There’s no one way to calculate the success of an investment. However, an investment’s profit is calculated through Return on Investment (ROI). Here’s the formula:
    ROI = (Current Value of Investment - Original Value of Investment) / Original.
  3. Are Investments Worth It?
    While several risks are associated with an investment, it allows you to grow your wealth. This is why it is essential that you conduct adequate research and diversify your portfolio to minimise losses.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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