What's an Investment and What Isn't

What's an Investment and What Isn't

investmentThe simple definition of the word “investment” is something you purchase with money that is expected to produce income or profit. The old saying about making money work for you – it’s talking about an investment. The problem for the beginning investor is that much of the printed and spoken content you find over the course of a day assumes you have a moderate level of knowledge on the topic, but what if you don’t? What if you’re not exactly sure what an investment even is?

Like Underdog, we’re here to save the day. The following list includes the major classes of investments and a little about each one; just enough to be dangerous, probably, but we’re going to tell you anyway. The primary type of investment is called ownership investment and it goes like this.

1. Stocks: A stock certificate is literally a piece of paper that declares you own a portion of a company. Even though most investors rarely have need to actually hold the certificate they own, they could call the company and have it sent out if they wanted. Partial ownership of the company entitles you to certain rights, such as the ability to sell it if the price goes up or you think it’s going down hard. A successful company will cause other investors to want a piece of the action, driving share price up on the open market. You can sell your shares at any time or hang onto them and reap dividend payments.

2. Business: Starting or buying into a business is also considered an ownership investment. This is normally a harder method to realize profit in but, when you do, the rewards could be extraordinary. Think Bill Gates for example. One of the main difficulties in investing in a business is that requires more than just money. You also need a great idea that people will pay for and someone willing to put lots of time and effort into the undertaking.

3. Real Estate: Often called history’s best investment, to invest in property is to invest in one of people’s basic needs, namely shelter. Everyone (almost) wants to have it or must have it for protection from the elements, therefore we like to call it a Universal Need. The profit potential for this type of investing is enormous but it sometimes receives a bad reputation when people who don’t really understand the proper way to invest get involved. With real estate, you can profit from both appreciation of the value of the asset and through cash flow when you rent it out.

This discussion has been an abbreviated thumbnail sketch about a particular class of investments. There are many others, of course, and we’ll get around to mentioning them eventually but these are the biggies. You could also invest in gold, foreign currency, a da Vinci painting, or a pair of Kobe Bryant’s basketball shoes, though we can’t say we’re awfully excited about the prospect of that last one unless it comes with odor eaters.

The Young Wealth Team


Flickr / Myrone