taye5) Different Types of Investments and How to Get Started

 Different Types of Investments and How to Get Started

What Is an Investment?

An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.

An investment always concerns the outlay of some resource today—time, effort, money, or an asset—in hopes of a greater payoff in the future than what was originally put in. For example, an investor may purchase a monetary asset now with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.

How an Investment Works

The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment.

In general, any action that is taken in the hopes of raising future revenue can also be considered an investment. For example, when choosing to pursue additional education, the goal is often to increase knowledge and improve skills. The upfront investment of time attending class and money to pay for tuition will hopefully result in increased earnings over the student's career.

Because investing is oriented toward the potential for future growth or income, there is always a certain level of risk associated with an investment. An investment may not generate any income, or may actually lose value over time. For example, a company you invest in may go bankrupt. Alternatively, the degree you investing time and money to obtain may not result in a strong job market in that field.

An investment bank provides a variety of services to individuals and businesses, including many services that are designed to assist individuals and businesses in the process of increasing their wealth. Investment banking may also refer to a specific division of banking related to the creation of capital for other companies, governments, and other entities. Investment banks underwrite new debt and equity securities for all types of corporations, aid in the sale of securities, and help to facilitate mergers and acquisitions.

Types of Investments

There's arguably endless opportunities to invest; after all, upgrading the tires on your vehicle could be seen as an investment that enhances the usefulness and future value of the asset. Below are common types of investments in which people use to appreciate their capital.

Stocks

A share of stock is a piece of ownership of a public or private company. By owning stock, the investor may be entitled to dividend distributions generated from the net profit of the company. As the company becomes more successful and other investors seek to buy that company's stock, it's value can also appreciate and be sold for capital gains.

The two primary types of stocks to invest in are common stock and preferred stock. Common stock often includes voting right and participation eligibility in certain matters. Preferred stock often have first claim to dividends and must be paid before common shareholders.

In addition, stocks are often classified as being either growth or value investments. Investments in growth stocks is the strategy of investing in a company while it is small and before it achieves market success. Investment in value stocks is the strategy of investing in a more established company whose stock price may not appropriate value the company.

Real Estate

Real estate investments are often broadly defined as investments in physical, tangible spaces that can be utilized. Land can be built on, office buildings can be occupied, warehouses can store inventory, and residential properties can house families. Real estate investments may encompass acquiring sites, developing sites for specific uses, or purchasing ready-to-occupy operating sites.

In some contexts, real estate may broadly encompass certain types of investments that may yield commodities. For example, an investor can invest in farmland; in addition to reaping the reward of land value appreciation, the investment earns a return based on the crop yield and operating income.

Commodities

Commodities are often raw materials such as agriculture, energy, or metals. Investors can choose to invest in actual tangible commodities (i.e. owning a bar of gold) or can choose alternative investment products that represent digital ownership (i.e. a gold ETF).

Commodities can be an investment because they are often used as inputs to society. Consider oil, gas, or other forms of energy. During periods of economic growth, companies often have greater energy needs to ship more products or manufacture additional goods. 

Cryptocurrency

Cryptocurrency is a blockchain-based currency used to transact or hold digital value. Cryptocurrency companies can issue coins or tokens that may appreciate in value. These tokens can be used to transact with or pay fees to transact using specific networks.

In addition to capital appreciation, cryptocurrency can be staked on a blockchain. This means that when investors agree to lock their tokens on a network to help validate transactions, these investors will be rewarded with additional tokens. In addition, cryptocurrency has given rise to decentralized finance, a digital branch of finance that enables users to loan, leverage, or alternatively utilize currency.

How to Start Investing

There are many different avenues one can take when learning how to invest or where to start when putting money aside. Here are some tips for getting started in investing:

Do your own research. A common phrase used in the investing industry, it is important for investors to understand the vehicles they are putting their money into. Whether it is a single share of a well-established company or a risky alternative investment endeavor, investors should do their homework in advance as opposed to relying on third-party (and often biased) advice.

Establish a personal spending plan. Before investing, individuals should consider their ability to put money away. This includes ensuring they have enough capital to pay monthly expenses and have already built up an emergency fund. As enticing as investing can be, individuals should be mindful to meet their daily life obligations first.

Understand liquidity restrictions. Some investors may be less liquid than others, meaning it may be more difficult to sell. In some cases, an investment may be locked for a certain period and cannot be liquidated. Though not necessary fine print, it's important to understand whether certain investments can be bought or sold at any time.

Research tax implications. On a similar note, though an investment can be bought or sold at any time, it may be tax-adverse to do so. With unfavorable short-term capital gains tax rates, investors should be mindful of strategies that extend beyond what product they hold but what tax vehicle they put that investment in.

Consult an adviser. Many financial professionals would be happy to provide their guidance, let you know what they think about markets, and give you access to online platforms where you can invest money.

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