What Is Investing? Real Talk For Real People.
What is investing? It’s a question that most people don’t fully understand. It appears like a simple action. When in reality, it’s quite complex.
It goes beyond the exchange of money. It’s more than brokers, sellers, and buyers. Investing extends across many different marketplaces. It crosses the line between physical assets, the metaverse, and personal property.
You can invest in just about anything that you want to. Its outcomes depend upon the type, duration, and place of the investment. Keep reading this article to understand more about investing, the history of investing, and the importance of investing so that you can get in the game to build wealth.
What is Investing
The simple definition of investing is the act of using money to purchase an asset that is expected to generate a profit later. In other words, it’s people giving someone else money with the expectation of getting more money back in the future.
Investing is a long-term strategy to make money with money. It’s not a quite bet to make some extra money today. That’s called speculating.
Investors invest in stocks, real estate, commodities, currencies, cryptocurrencies, derivatives, and more. Some invest in fine art, antiques, wine, and other alternative investments.
The return on investment depends on the amount of risk taken, the supply and demand for the asset being invested in, and the duration of the investment.
Regardless of how people invest, it’s a calculated decision. The type of investment you choose is determined by your knowledge of the investment and risk tolerance. Investors that are willing to wait for max profits are assuming a long-term risk that their investment will appreciate.
Investors can invest with or without the help of a broker, financial advisor, financial planner, or money mentor. However, as Warren Buffett said, “Never invest in a business you cannot understand.” You need to understand what you’re investing in regardless of who is helping you. This is true for stocks or private investments.
History of Investing
The modern investment structure dates back to the 1600s with the Amsterdam Stock Exchange founded in 1602. It worked like today’s stock market, where investors were connected with businesses looking for capital. Capitalism has long relied on investors to fund growth and innovation.
The Amsterdam Stock Exchange was followed by the London Stock Exchange in 1801 and the New York Stock Exchange (NYSE) in 1792.
The NYSE was established by 24 brokers who signed the Buttonwood Agreement to organize and trade securities In New York. The earliest securities were traded as war bonds and stock from the First Bank of the United States and The Bank of New York. The stock exchange worked in an auction format with an auctioneer bringing buyers and sellers together. Seats on the floor of the NYSE went for as much as $6 million dollars (accounting for inflation today).
A surging economy led to speculation in the market and an eventual crash called the Great Depression of 1929. The NYSE eventually recovered and trades became more regulated, electronic, and automated.
For a long time, investing was complex and reserved for people with access to the markets. History says that in 1952, less than 5% of Americans owned stocks. But the system as we know it began to change in the 1970s.
In 1978, Congress passed a new tax code for employees to have a tax-advantaged way to defer compensation and stock options into a 401(k). As pensions were moved away from employer-defined benefit plans to the employee, more people began to own stocks and learn about the stock market.
But investing still favors those with greater access to money and assets. As of 2021, a Gallup poll found that 56% of Americans own stock. However, only 24% of households earning $40,000 or less own stocks. There is hope for more families to build generational wealth with investing given the rise in commission-free trading platforms. More work is needed.
Why Is Investing Important?
Investing keeps the economy growing. It inspires innovation and growth. It’s the reason we have 5G internet, electric cars, people flying to space, medical miracles, and so much more. People have invested in things they believed in order to fund projects that had a bright future.
For you and me, investing can be a game-changer. It’s a sure-fire way to increase our net worth and build generational wealth. Although people have built personal fortunes through a few good solid investments over 20 to 30 years with compound interest, it’s not a get-rich-quick scheme. It works best through dollar-cost averaging and regular investing over the long run.
Let’s talk about Joe. He started investing at 25 years old with his tax-deferred 401(k). He started a Roth IRA at 30 years old. Today he is 55 and ready to retire early. For simplicity, we’ll say he invested 10% of his 75,000 salary in his 401(k) for 25 years (assuming an 8% return) and an extra $500 a month in his Roth IRA (assuming a 12% rate of return). Today he has over $880K in his 401(k) and more than $840K in his Roth IRA that is tax-free.
Not bad. Right? And what’s even better is that he will probably have more in his 401k given raises over the 30 year period.
How Does Investing Work?
Investing begins with sellers, selling a piece of the company for a certain price to a given investor (the buyer). For every seller, there has to be a buyer. Most transactions are electronic and recorded on a ledger that is managed by a brokerage or a private institution.
Buyers then own a piece of the company that they can turn around and sell to someone else or back to the company.
The return on investment varies depending on the asset. Certain assets may be more valuable than others.
Investing is risky. There are no guarantees in investing. Some investments win and some lose. Generally the safer the investment, the lower the return on investment. The higher the risk, the greater the return.
Types of investments
Investors can invest in just about anything you can think of. However, most investors diversify their portfolios to minimize the risks of loss. Here’s a list of some of the most common investments:
- Stocks to include exchange-traded funds (ETFs), mutual funds, target-date funds, index funds
- Retirement accounts
- Real Estate
- REITs (Real Estate Investment Trusts)
- Non-fungible tokens
- Private businesses
- Personal businesses
- Crowdsource funds
Places to invest
Although Wall Street was once reserved for the wealthy, technology has brought investing to everyone today. You can invest money in public and private marketplaces. The most common investments are stocks in a tax-advantaged Roth IRA or employer-sponsored retirement plan.
Most people are unlikely to outperform the market and as such, they prefer a passive investment strategy that yields good returns such as an exchange-traded fund or target-date fund. Less than 20% of households invest directly in stocks with a taxable brokerage account. You can easily get started with stocks using an online broker or brokerage account through some common names like TD Ameritrade, Charles Schwab, Betterment, Acorns, Fidelity, M1Finance, and many more.
If you’re interested in crowdfunding, check out CrowdStreet, FundRise, RealtyMogul, YieldStreet and a few others.
If you’re interested in wine investing, you can check out Vinovest or WineInvestment. If you like art, google some art dealers across the country. Google has tons of sources for you to check out.
What’s the difference between investing and saving?
Saving is just putting your money away for a rainy day. It’s not expected to grow and you can technically spend it whenever you want.
There’s no risk with savings. The opportunity for growth is minimal to none with savings alone. It’s best to put savings in a high-yield savings account when possible to maximize returns. If saving is challenging for you, look into automatic savings with round-up change to make it easier and stress-free.
Your money will not grow with savings. But it will be protected. Saving works best for emergency funds, big purchases, and planned expenses.
It’s just storing money for another day rather than spending it today. It’s not a long-term strategy. You can’t beat inflation with saving because a dollar today is worth more than a dollar tomorrow.
What’s the difference between investing and speculating?
Speculating is just that…speculating. Speculators are along for the ride. They don’t have any reason other than good feelings that their investment is going to increase in value. They’re placing a bet on something that they like. There’s a place for speculating but put your priorities first. Saving for retirement and emergencies should come first.
Some consider crypto investing, penny stocks, and pink sheet investing to be speculative. Do your homework to determine if you are investing or speculating. You can lose a lot of money without proper planning and a solid investment strategy.
Investing has existed for centuries. Companies have looked to expand by raising capital through the sale of stock for a long-time.
You can invest your money in public and private equities. Do your own research to find the best investment products for you and your financial goals. Investing money is risky and not without volatility in its value. Learn how to invest in stocks, develop strong investing strategies, and always do your homework.
If you can’t afford to lose money, consider stashing your money away in an FDIC high-yield savings account rather than investing it. It’s best to put your emergency fund in a savings account for easy access.
Make sure your investment portfolio is solid for you and your investment risk tolerance. If you don’t understand something, take a good online course to learn how to invest or read an investing for beginners book. There are so many options to help you get started.
Start investing for yourself and remember it’s best to build wealth slowly. Buy-and-hold investors focus on owning solid companies in a diversified portfolio with blue-chip companies that pay dividends, indexes that mirror the broader market, and ETFs to minimize market volatility and risk. Diversification is important.
How much money you invest is personal. It can pay-off in the long term. Shoot for at least 10% of your take-home pay with a good investing strategy. Don’t try investing without a plan.
So, talk to me. Where are you with investing? Comment below.
Theresa is a personal finance blogger. She writes content for busy professional women to take control of their money and investments. She enjoys reading, traveling, cooking, and writing. Her work has been featured on GoBanking Rates, Your Money Geek, Savoteur, the Corporate Quitter, Thirty Eight Investing, and more.