Thread: What is Investing and How Does it Work?

Business news and self-help books bandy about the "investing" as if it were a magic word but rarely define it or explore the basic concepts surrounding it. This is despite the fact that investment is an elementary concept in personal financial management, right after debt management and savings. Understanding the basics of investment are key to creating and expanding personal wealth.

Identification
Investing is when a person chooses to risk savings in hope of creating a return. Investments come in a variety of shapes and sizes. Interest-bearing savings products, real estate, businesses and stocks are all examples of investment. A more unorthodox notion of investment is the personal investment, or spending money on personal education in hopes of earning greater return on one's own labor through improved skills. Even gambling can be considered a form of investment under the right circumstances, especially when compared to short-term stock picking.

Considerations
The two key considerations in investing are risk and return. Some investments are riskier than others, but inevitably high risk is associated with a higher rate of return. For example, interest-bearing savings products, such as CDs, savings accounts and bonds always have very low rates of risk, but also low rates of return. On the other hand, it is possible to generate high rates of return by speculating on the stock market or in real estate, but the corresponding risks are also much greater.

Features
Most middle class Americans have reasonably diversified investments in the following areas: they own their own homes, which is a form of real estate investment; they own stocks, either directly or through a retirement plan and they have savings assets. Some are also small business owners, with capital spent on their businesses in hopes that it will yield a return.

Potential
Investment in some form is the only means by which a private individual can create wealth outside of labor. Basically, individuals have two means of making money (as opposed to inheriting it): earning it and returns on investments.

Expert Insight
A sound personal financial management plan should always call for the elimination of debt and the accumulation of savings prior to investing. Excepting the case of starting a small business, you should never borrow money to invest, and you should never invest money that could be used to reduce debts. An investment that offers a nine percent return is enjoying outstanding performance, but a credit card debt could easily be compounding interest at a rate as high as 22 percent, very few investments will ever perform well enough to outpace debts. The plan should always be to eliminate debt, then save, then invest and then stay as debt free as possible.

thanks and good luck

Ramadan Radwan

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