The term investing refers to a number of financial activities that involve lending money to another party and the expectation that the recipient will repay the lender with interest or money at a later date. To lend is also to put money into an account with the hope of a return in the near future. Simply stated, to lend means to put money into an account or a portfolio with the intention of earning an income from the investment or simply the appreciation of the value of that asset over some period of time. This is how people earn money. They buy something today and sell it later for a profit, and in doing so, they are actually investing.
However, many people are wary of investing in terms of what is termed stocks and bonds, for fear that they may lose their hard-earned money in an investment opportunity that they may have not fully considered. There are several ways one can go about investing in stocks and bonds. One may opt to buy shares in a company. It is important to keep in mind that buying shares in a company does not necessarily guarantee a guaranteed future income or return on investment. Investing in shares is simply part of the stock market and just like any other market there are ups and downs, depending on how volatile the market is in a given time.
Another option for investing in stocks and bonds is through asset allocation. An individual or a company creates a list of different assets and then invests in those assets. The idea is that as the investments in those assets increase so will the individual’s or company’s net worth. There are various different types of asset allocation strategies, and each of them is meant to create a portfolio that will ensure a more or less certain level of future income or profit. A common strategy is to invest in stocks and bonds that are internationally focused, so as to ensure a better chance at seeing an increase in income due to the rising value of those currencies.
An investor may also choose to make use of exchange-traded funds, or ETFs, as an option when investing. An ETF is essentially a kind of insurance on the performance of a specific exchange-traded fund. For instance, in the case of an ETF for equities, the investor would want to ensure that the fund which she invests in performs strongly during economic downturns. An ETF for commodities is designed to be able to survive even the worst of market fluctuation. The major advantage of these ETFs is that they require minimal management on the part of the investor, since the ETF company usually handles all of the brokerage in addition to dealing with investors and ensuring that their transactions are processed as efficiently as possible.
An investor may also take advantage of lower-cost index funds when investing. These kinds of funds were initially created as an answer to the problem faced by high-fee professional stock investors. The index funds were able to offer a higher price appreciation at lower costs because they had access to cheap corporate bonds, more efficiently managed mutual funds, as well as other advantages. When you are dealing with these kinds of opportunities, the investor need to be especially mindful of expenses related to order entry and execution, margin requirements, transaction fees and other charges. When you are working with an index fund, you will certainly need to pay a transaction fee in addition to the cost of your index fund, unless the investment is managed by a particular broker who is not tied to any particular index or is free from commission concerns.
Investing in bonds and stocks is another way of making money when you are still relatively young. It is a great way of building your portfolio while protecting yourself against loss of investment liquidity should you be unable to participate in a wide range of stocks and bonds. Another advantage is that you can use a variety of investments from time to time without having to get rid of your protected investments. As long as you continue to hold onto your own stocks and bonds, you can diversify your portfolio and reduce risk.