Investing
Investing is putting resources or money to earn income or profit. You can invest in startups, assets, or buying real estate to resell it at a higher price.
Understanding Investing
The wish for income is the main reason for investing. The range of assets for investing is very wide.
The lower the risk, the lower the return on investment. Basic investments (CDs - certificates of deposit) are among the low-risk investments. Bonds and fixed income tools are riskier investments. Stocks are seen as even riskier. Commodities and derivatives are considered the riskiest. Investments in land or real estate are more practical. Investments in art and antiques are also popular.
Risk and profitability differ wildly even in one asset class. For example, a big company asset traded on the New York Stock Exchange will have a different risk/return profile than a small company one traded on a small exchange.
The type of asset determines its yield (stocks earn dividends and bonds earn interest every quarter). Different places offer different types of income at different rates.
Dividends, interest, and price increases contribute greatly to returns. Total investment income equals income and capital gains. The Standard & Poor's March 2019 estimate is that since 1926, dividends have provided one-third of total stock returns and capital gains two-thirds.
Types of Investments
The most common types of investments:
Stocks. The owner of stock in a company (shareholder) becomes a co-owner of that company. Shareholders can raise stock prices and regular dividends, which helps the company grow.
Bonds. The owner of a bond gets to own a share of the organization's debt. These are debt obligations of the government, municipalities or corporations. The owner of the bond can get periodic interest payments and a refund of the bond face value when it matures.
Funds. They allow people to invest in pooled instruments (stocks, bonds, preferred stocks, commodities, etc.) and are controlled by investment managers. Mutual funds (not exchange traded and valued all trading day long) and ETFH (or exchange traded funds are exchange traded and, like stocks, valued continuously throughout the trading day) are actively managed. Another way for managers is to track certain indexes passively.
Investment trusts. They are part of pooled investment. REITs (real estate investment trusts) invest in commercial or residential real estate and pay regular dividends from the rental income from that property. REITs have the advantage of instant liquidity because they are traded on stock exchanges.
Alternative investments. A general category covering hedge funds (can hedge their investment bets by making long and short trades in investments) and private equity (companies increase capital staying nonpublic). Only "accredited investors" (wealthy investors) have access for hedging funds and private equity. Accredited investors have to get certain income and meet net worth requirements. But now there is a trend to make alternative investments available for retail investors.
Options and derivatives. Derivatives are tools for obtaining value through other ones (stocks or indexes). An option is a popular derivative instrument to trade securities at a fixed price over a period of time. Derivatives are high-risk and high-yield instruments (there is leverage).
Commodities. Metals, oil, grain and livestock products, financial tools and currencies are traded either through commodity futures (agreements to deal in a certain quantity of a commodity at a certain price at a certain date in the future) or through ETFs. Commodities can be used to hedge risks or for speculative purposes.
Investing Styles
Active investing. The aim is to "beat the index" by actively managing the investment portfolio.
Passive investing. It advocates buying an index fund, recognizing the difficulty of beating the market consistently. Just a few fund managers can explain the higher costs of active management beating their benchmarks consequently enough.
Growth. Growth investors support high-growth companies with higher valuation ratios (for example PE - Price-Earnings).
Value. Value companies may be not so popular for a while among investors and have lower PE's and higher dividend payments.
A brief history of Investing
The modern type of investing appeared during the development of the first public markets and the formation of connections between investment participants and opportunities in the 17th - 18th centuries. The Amsterdam Stock Exchange (1787) and the New York Stock Exchange (1792) were established.
After the Industrial Revolutions of 1760-1840 and 1860-1914, people had the opportunity to accumulate savings that could be invested. So, in the 1800s, the banking system began to develop and the most popular banks appeared, which dominate the world of investing now.
Investment theory went through changes in the 20th century. New fundamentals, asset pricing concepts, portfolio and risk management theories, and investment vehicles (hedge funds, venture capital, private equity, REITs and ETFs) appeared. Research and trading opportunities became widely available in the 1990s with the fast Internet distribution.
At the beginning of the 21st century, a new generation of millionaires (people who invested in technology and internet businesses) appeared. In 2001 Enron, its accounting company Arthur Andersen and many investors went bankrupt.
In 2007-2009, the Great Recession occurred (most investments in mortgage securities failed and destroyed economies around the world).
Popular banks and investment companies went bankrupt, foreclosures increased and the standard of living gap increased.
Investing has become much more democratic in the 21st century. Online investment and trading platforms and apps for newbies and non-standard investors with discounted investment companies appeared.