What is an investment?

Understanding investments

An investment in general involves the outlay of money, especially in the investments such as stocks, options, funds and bonds, among others. Investments are made upon the desire for a greater payoff, but sometimes an investment may carry risks of missing your expectation, taking up your resources or shrinking your assets. Therefore, doing due diligence before making investment decisions is necessary to mitigate risks as much as you can.

Investments are made upon the desire for a greater payoff, but sometimes an investment may carry risks of missing your expectation, taking up your resources or shrinking your assets.

When you make an investment, you trade resources (like money or credit) for assets (like stocks or real estate) in an attempt to gain future benefits. For example, an investor might purchase stocks believing that they’ll appreciate in value or to collect dividend payments. A student might invest in a college degree with the hope of starting a fulfilling career. Investments are often thought of in terms of money, but you can also invest other resources, like time and labour (like a business might).

An investment can produce losses if the acquired asset’s value decreases or if other realised benefits don’t meet expectations. Where there’s a potential for reward, there’s also risk.

So, what is an investment?

When you invest, you trade current resources to acquire an asset that will hopefully generate future benefits. Ideally, if you invest an asset at the right time and place, your investment may potentially gain value. For example, when you invest in the stock market, you typically trade money (an asset) for stocks. There are many different types of assets a person might invest in — stocks, bonds, commodities, mutual funds, and real estate are just a few common examples. 

There are many different types of assets a person might invest in — stocks, bonds, commodities, mutual funds, and real estate are just a few common examples.

What are the types of investments?

Just as you can grow many different types of plants in a garden, you can put your money and other assets into a variety of securities. Depending on the investment, there may be different potential for returns, risks, and other characteristics, such as management fees and tax ramifications.

Stocks

When you invest in a stock, you’re essentially buying a small piece of ownership in a company. When people invest in stocks, they tend to do so with the hope that the stock’s price will have increased by the time they decide to sell. Selling a stock at a higher price often means that you’ll profit from the sale. Some companies distribute profits to shareholders through quarterly dividend payments to owners of common stock.

Bonds

When you buy a bond, you’re lending your money to a government, company, or other borrowing entity. In exchange, your debtor (aka the bond issuer) is generally obligated to repay the debt, plus interest. Companies and occasionally countries are sometimes unable to make their bond payments, however, and default. Traditionally, a bond is a fixed-income instrument, meaning it provides payments on a fixed schedule. Bonds typically have an end date (aka maturity date), on which the final interest payment is made and the original amount loaned is paid back.

Other investment categories:

There are many other financial investment classes, such as real estate, futures, Certificates of Deposit, cryptocurrency, options, commodities, and more. Before investing in any asset, it’s important to understand the terms, fees, and risks involved.

Business investments are often associated with stocks, capital goods, and physical capital. But many companies also invest in human resources.

How do I start investing?

Before investing, keep in mind that all investments come with potential risks. It’s important to do your research first — whether you’re deciding what to invest in or whether to hire a professional to help. It can also help to understand what your investment goals are and your ability to handle risk. Historically, markets have experienced both upswings and declines — in the past, generally speaking, the stock market has gained over longer periods of time (20+ years).

Before investing, understand what your investment goals are and your ability to handle risk.

Typically, getting started as an investor in the market involves opening an investment account that allows you to buy and sell shares. Some investors may hire a broker who can execute trades on behalf of their clients by bidding on stocks and other assets. Others may hire a portfolio manager to oversee their investments.

Key Takeaways

• An investment is an asset bought in the hope of generating income or profits over time.

• Investments are made upon the desire for a  greater payoff, but sometimes an investment may carry risks of missing expectations.

• Learning is a kind of investment, which could be the most common and must thing for individuals new to investing.

This article is for educational purpose and not to be regarded as investment advice, a recommendation, or an offer or solicitation to subscribe for, buy or sell any investment product. All forms of investments are subject to risks, including the possible loss of the principal amount invested. Losses can exceed your initial deposit. You should carefully consider your investment experience and objectives, financial situation, and risk tolerance level, and consult an independent financial adviser prior to dealing in any investment products. The contents in the article may have been obtained or derived from public or other sources believed by CMC Invest to be reliable. However, unless otherwise specifically stated, CMC Invest makes no representation as to the accuracy or completeness of such sources or the information, and accordingly accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. Please visit www.cmcinvest.com/en-sg/ for important information. This advertisement has not been reviewed by the Monetary Authority of Singapore.