An investment is something you buy or put money toward with the expectation that it will generate more money, which are called returns, in the future. A common example of investing is putting money into the stock market in hopes that your initial investment will grow.
Investors are individuals or companies that put money into a corporation and expect financial gain. The recipients of the investment are usually entrepreneurs or companies that need liquid capital or money that they can access and use immediately. This difference is solved by the process of investment. Investors with surplus funds lend them to others who need them now, usually receiving interest on their funds or a defined share of the profits made by the investment project.
Types of Investments
Investments range from financial instruments, such as stocks or bonds, to individual investments, such as buying property or loaning money to a friend to help them start a business. Savings in a bank are a type of passive investment since the bank uses customers’ savings and repays them a minimal interest rate.
For example, imagine your friend wants to open a bakery but has no money for rent or the necessary appliances. You offer to invest some of your money into the bakery to help. Your friend offers you two ways to pay back your investment: an interest payment at 10% until they completely pay back the loan or 10% equity, giving you 10% ownership of the business and potential revenue when the bakery is profitable.
Although both are interesting offers, they have their own risks and benefits, depending on how big the investment was (which determines how much interest you will earn) and the possible growth of the business.
If you make a good investment, future wealth created by delaying current purchases can be astronomical. The amount of money you invest, the time horizon for the investment, and the success of the project will all raise your rate of return.
For example, in 1997, an Apple laptop cost nearly $6,000 but would be worth barely $50 today. Instead of purchasing that laptop, however, if you had invested $6,000 in Apple’s stock, it would be worth more than $300,000 today. Remember, though, that not all investments are lucrative. If Apple had not succeeded as an enterprise, you may have lost all or most of your $6,000 investment.
How much would past investments in major technology companies be worth today? Find out by clicking here.
Investing is an important commitment to future prosperity. This kind of commitment is made harder by what psychologists call “present bias,” which is the tendency of people to irrationally prefer gratification today over a larger gratification tomorrow. For example, many people would rather have $4 today over $5 a week from now, but almost nobody would choose $4 a year from now over $5 a year and a week from now. The famous “marshmallow experiment” illustrates the power of present bias in individuals at even a very young age. To watch the marshmallow experiment, click here.
- Warren Buffett quotes on investing:
- “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
- “The best investment you can make is in your own abilities. Anything you can do to develop your own abilities or business is likely to be more productive.”
- “There are all kinds of businesses that [longtime partner and vice chairman of Berkshire Hathaway Charlie Munger] and I don’t understand, but that doesn’t cause us to stay up at night. It just means we go on to the next one, and that’s what the individual investor should do.”
- According to Erik Falkenstein, “In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”