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Investing is the process of putting your money into assets such as stocks or real estate so that you can earn a profit later on.
Investing may seem complicated at first, or even scary. But a little basic knowledge can help you feel more comfortable with the process. In this article we’ll look at how investing works and what kinds of investments you may want to consider.
Here’s what we’re going to cover:
- Why invest?
- Understanding investment risk
- What are the different types of investments?
- Getting started with investments
- Oportun: Save and invest at your own pace
- Investing is the process of putting your money into assets to earn a profit. Common types of investments include stocks, bonds, commodities, real estate, and funds.
- All investment involves some degree of risk. Higher-risk investments fluctuate more in value, while lower-risk investments tend to be more stable over time.
- Successful investments can help you keep up with inflation, increase your purchasing power, or save for retirement.
- Investment is a long-range tool for increasing your wealth, not a way to get rich quickly.
There are two main reasons why you may want to invest your money.
Building your wealth
One reason to invest your money is to build your wealth. If the return on your investments is greater than the rate of inflation, your investments will be even more valuable.
As your wealth grows, you can raise your standard of living and put aside more money for retirement.
Protecting your purchasing power
Another reason to invest is to protect your purchasing power from rising inflation.
Inflation is the increase in the cost of goods and services over time. In 2022, the U.S. inflation rate reached a 40-year high of more than 8 percent. Because of inflation, many products and services now cost more than they did a few years ago. This means that the purchasing power of your money has gone down—your dollars can’t buy as much as they did in the past. Successful investments may help you keep up with inflation.
Understanding investment risk
All investment involves some degree of risk. The primary risk is the possibility of losing all or part of the money you invested. There is no guarantee that your assets will increase in value, although some investments carry less risk than others.
Low-risk investments tend to stay relatively stable in price. You may earn less money from them, but you can enjoy more peace of mind. High-risk investments are more volatile, meaning that their prices may go up and down considerably within a short time. They may offer the potential for greater earnings, but your losses could be greater.
Remember that investment is a long-range tool for increasing your wealth, not a way to get rich quickly.
Everyone has a different degree of risk that they feel comfortable with. Younger people can keep their money invested for many decades, so they may be willing to take greater risks. Older people may prefer to avoid high-risk investments, as they will need to use their money sooner for retirement.
Before you begin investing, it’s important to determine how much risk you are willing to take. No one else can decide your risk tolerance for you; it’s a matter of personal choice.
One way to reduce your risk is to invest in a variety of assets. This strategy is called diversification. When your assets are diversified, a loss of money in one investment could be offset by a gain in another. This gives your portfolio more stability than investing in a single asset.
What is a portfolio?
Your financial portfolio is the collection of your investments.
What are the different types of investments?
There are many different ways to invest your money. The right choices for you will depend on your financial goals and how much risk you can tolerate. It’s important that you feel comfortable with whatever you decide to do.
Here’s a quick rundown of the most common types of investments.
A stock is a share of a company. When you purchase a stock, you become a shareholder and own a small part of the company. If the company earns profits, the value of your stocks may increase. If the company loses money, the value of your stocks may go down.
When you buy a bond, you are loaning money to a business or a government agency for a specific period of time. In exchange, you receive regular interest payments. When the bond’s term ends, your original investment should be paid back to you.
Bonds are usually considered a safer investment than stocks. But some bonds, especially from companies with low credit ratings, can be risky. If the company that issued your bond is unable to pay you back, you could lose your investment.
Real estate is property such as homes, commercial buildings, and undeveloped land. Investing in real estate is an especially popular choice with millionaires, because real estate values tend to go up over time.
Purchasing real estate can help you earn money in two ways. You can rent out your property to receive a regular income. Or, if your property increases in value, you can sell it at a higher price than you paid.
A fund manages investments collectively for many people. Funds typically buy and sell a variety of stocks, bonds, and commodities. Each person who invests in a fund shares in its profits or losses.
Funds are popular in part because they don’t require you to have knowledge of specific assets. You choose a fund, and the fund chooses where to invest your money for you. Many people find this an easy way to diversify their investments.
Mutual funds are run by professional money managers who specialize in finding the best investments for their clients. Investors pay fees and commissions for this service.
Exchange-traded funds (ETFs) are sometimes managed by automated robo-advisors. Their fees are lower, but ETFs tend to fluctuate more in value than mutual funds.
Getting started with investments
You don’t need to be rich to begin investing, but you do need to have some money saved. Then you can decide how much of it you want to invest.
With so many options available, how do you know what to invest in? Here are three ways to get started.
Robo-advisors are automated platforms that pick investments for you based on your risk tolerance and financial goals. Robo-advisors typically charge low fees and have low investment minimums, making them popular with first-time investors.
Online brokerage accounts
If you prefer to choose your own investments, you can open an online account with a brokerage. These accounts are easy to use and often charge affordable fees.
You can also hire a financial advisor. These professionals select investments that align with your financial goals, then actively manage your assets for you. Financial advisors tend to charge higher fees, so it’s often wealthier investors who use them.
Oportun: Save and invest at your own pace
- Save and invest effortlessly
- Set goals and track your progress
- Contribute at your own pace
Ready to start saving and investing? Download the Oportun app today!
Wall Street Journal. U.S. inflation accelerated to 8.5% in March, hitting four-decade high
Investopedia. What is diversification?