Investing is a term used to describe a financial activity that aims to create a return on the initial investment made by an investor. An investor can invest in stocks, bonds, mutual funds, and so on. To invest in the stock market is to put money into an entity with the aim of creating a profit for oneself or another person. Simply put, to invest in the stock market means buying an entity or an object with the intention of creating a profit for oneself or another person, usually in the form of dividends.
Some common examples of investing activities are: buying and holding, short selling, options trading, and commodity investing. Each of these categories has its own distinct advantages and disadvantages, but they all essentially come down to one fundamental factor: expected returns. In other words, what are the expected returns in relation to what the seller or buyer is willing to pay for the underlying shares? This is the crux of investing, as buying something today means that you will make a profit tomorrow, to buy something under the right circumstances but at a bad time means that you might lose money at some point.
There are two main different types of investing: buy and hold and buy and sell. The difference between these two is not merely a matter of money management. No matter which type of investing you are undertaking, there are fundamental differences between the expected returns and risks of each.
Most people invest in stocks or bonds because they are the safest way to create a long-term investment portfolio. Stocks and bonds offer the best combination of risk and return available in any market. Investing in equities can be risky, especially when you have poor stock or bond history to speak of, but equities offer a very wide variety of different types of growth opportunities, from dividends to growth in market cap. Bond investing offers only fixed interest income as an asset allocation strategy, but it does so without giving up any potential growth.
Another common type of investing is bond investing, which some investors feel offers the least amount of risk. Bond investing offers higher interest income and lower volatility than stocks do, making them appealing to many investors. It is important to remember however that bond investments do not offer any flexibility; if the market fell, so does bond funds invested in that stock.
The most common type of investing is through buying and holding. Buying and holding allows you to keep your initial investment, regardless of the performance of the market. This allows you to enjoy small gains over time as well as the security of having your initial investment locked into the security. By keeping your initial investment steady, you will have a much better chance of weathering stormy market conditions and still be able to reinvest and keep making strong gains. Different investors have different styles and methods of investing, and the type of investment you choose should reflect that style and method.