Investing and Finance
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What Is Investing?
Investing, broadly, is putting money to work for a period of time in some sort of project or undertaking to generate positive returns (i.e., profits that exceed the amount of the initial investment). It is the act of allocating resources, usually capital (i.e., money), with the expectation of generating an income, profit, or gains.
One can invest in many types of endeavors (either directly or indirectly), such as using money to start a business or in assets such as real estate in hopes of generating rental income and/or reselling it later at a higher price.
Investing also differs from speculation, as evidenced by the investor's timeframe. Speculators are typically looking to gain from short-term price fluctuations that occur in weeks, days, or even minutes. Investors usually consider that a greater period of time, like months or years, is needed to generate acceptable returns.
Key Takeaways
Investing involves deploying capital (money) toward projects or activities expected to generate a positive return over time.
The type of returns generated depends on the type of project or asset; real estate can produce both rents and capital gains; many stocks pay quarterly dividends; bonds tend to pay regular interest.
In investing, risk and return are two sides of the same coin; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk. Investors can take the do-it-yourself approach or employ the services of a professional money manager.
Whether buying a security qualifies as investing or speculation depends on four factors—the amount of risk taken, the holding period, the frequency of the investment activity, and the source of returns.