What is an Investment?Investments are one of the pillars of personal finance, and when money is invested well, it can grow by leaps and bounds to help you achieve your financial goals. What exactly qualifies as an investment, though, can be hard to define. Some people have very narrow ideas of what investments are, while others cast an overly broad net and label almost everything as an investment. So, to help you use your money wisely, we’ll be investigating what the term “investment” applies to, as well looking at some common investments you should consider.

The definition of investment

According to the Merriam-Webster dictionary, the broad definition of investment is “the outlay of money usually for income or profit.” It also has a specific financial definition, which is “an asset intended to produce income or capital gains.” Put more plainly, an investment is something you spend money on now that makes you more money later. There are two primary ways an investment can make money, the first of which is by letting you resell it later for more than you bought it. For instance, if you buy a plot of land, and then the area’s property values go up, you can sell that land later for more money to make a profit. The second way investments make money is by enabling you to lend the investment out. If we go back to the plot of land example, instead of selling the land, you can make money by letting people use the land if they pay you rent. When you break it down, many investment vehicles, such as savings accounts, certificates of deposit and bonds, involve lending your money to an organization, and that organization paying you a fee (or interest) in return.

Now, some businesses try to advertise consumer goods as investments. For example, a salesperson may say that a particular television is a good investment because it’s extremely reliable and has great picture quality. While that television may be a good purchase, it isn’t an investment because it’s almost definitely not going to make you any money if you ever try to resell it. Even a car isn’t an investment in most cases, unless you’re buying one specifically as an asset for a business you run. There is an exception to this rule in the form of collectibles, such as original artwork or rare comic books, which can function as investments on the idea that they will increase in value as they become harder to find. However, they’re investments with a very high degree of risk, and you probably shouldn’t get involved with investing in collectibles unless you’re an expert on the collectible’s subject area.

Common investments to consider

Savings accounts: Savings accounts are excellent places to store an emergency fund or a chunk of money you think you’ll need in the near future. It’s easy to access the money in them, many are low-risk because they’re insured by the FDIC and they don’t require much financial knowledge to use. The biggest downside is that they tend to produce fairly low yields, with some traditional bank savings accounts returning only 0.01% of the balance per year – although, it’s worth mentioning that online high-yield savings accounts these days tend to return at least 1.5% per year. A savings account is a great starting point for first-time investors and saving money for an opening deposit on a high-yield savings account is a solid financial goal.

Stocks: Stocks are small shares of ownership in a company, which give you a stake in how well the company does. You can profit from stocks by buying them when they’re cheap and selling them off when their prices go up. Additionally, some stocks produce dividends, which are regular payments to stockholders based on the company’s profits. The stock market can go up and down quite a bit, so there’s a good amount of risk to investing in stocks. However, stock market investments tend to produce high returns, and as we’ve noted before, the market as a whole has trended upward for the past 80 years. If you’d like to invest in the stock market, there are a variety of apps and services that can help you get started without a large deposit. Unless you follow the stock market religiously, though, you may want to skip buying individual stocks and instead invest in a fund, which is a diversified portfolio of stocks that is managed by a professional, who takes a commission fee for their services. Just make sure that you are utilizing a legitimate professional so you don’t lose any money to scammers.

Bonds: Bonds have a fixed interest rate and a fixed ending date (also called the maturation date), so when you invest in a bond, you will know exactly how much money you’ll make and exactly when you’ll get it from the start. If you need to pull your money out of a bond early, there is typically a penalty of some kind, such as losing the last few months of interest. Both corporations and governments issue bonds, and they’re usually fairly safe investments that pay between 2% to 3.5% interest annually. Most bonds take a long time to mature, which is why they make good gifts for children to teach them about finances and give them a financial head start. If you’re looking for an investment with a shorter term, you should instead consider certificates of deposit (CDs). These work a lot like bonds, but they’re issued by banks, including online banks, and are available with terms that only last a few months.

Real estate: Real estate is a very common investment for a few reasons. It comes with many tax advantages, it reliably tends to increase in value and renting your real estate properties can provide steady passive income. One important thing to note, though, is that it’s debatable whether a home you buy to live in yourself is an investment. While your home could increase in value and let you turn a profit if you decide to sell it later, your home is primarily fulfilling your need for shelter, not generating income. As such, buying a four-bedroom house when you only need two bedrooms, just because you think it will have great resell value later, typically isn’t a smart investment decision – more likely, it’s a waste of money.

Businesses: If you use your own money to start or grow a small business, you’re making an investment. Businesses are all about providing a service to generate profits, and if you grow your business enough, you can eventually sell it. However, starting a small business is riskier than a lot of people think. According to data from the Bureau of Labor Statistics, 50% of businesses don’t survive their first five years. Still, there’s a reason why most of the wealthiest people on the planet are business founders, as a successful business is an investment that can provide massive returns.

Whether your goal is a comfortable retirement, financial independence or just a bit more money in your savings, investment can help you achieve it. For more on how you can make your money work for you, follow our personal finance blog.