What is Investing?
Investing involves committing money or capital to an endeavor with the expectation of obtaining an additional income or profit. Unlike saving, which is about setting money aside in a safe place, investing involves taking on some level of risk with the goal of achieving higher returns. The primary goal is to make your money work for you.
Common Types of Investments
- Stocks: Also known as equities, stocks represent ownership in a publicly-traded company. They offer the potential for high growth but also come with higher risk.
- Bonds: A bond is essentially a loan you make to a government or corporation. In return, they pay you periodic interest payments. Bonds are generally considered safer than stocks.
- Mutual Funds & ETFs: These are collections of stocks, bonds, and other assets, bundled together. They offer instant diversification, which is a key strategy for managing risk.
- Real Estate: This can include owning physical property or investing in Real Estate Investment Trusts (REITs).
The Relationship Between Risk and Return
A fundamental principle of investing is the risk-return tradeoff. This means that investments with higher potential returns typically come with higher risk. Understanding your personal risk tolerance is crucial before you start investing. A diversified portfolio, which spreads your money across different asset classes, is the most common strategy for managing this risk.
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