It sounds so big and grown up and scary. It’s the shadowy thing rich guys in movies do. Kids who talk about their “stock portfolio” on TV are supposed to be little geniuses. So of course, only the very smart or the very rich invest, right?
Everyone, including you, can invest.
What does it mean to invest?
Investing, at its core, is simply buying something and expecting it to return something to you.
Most of the time, the return is money. Sometimes it’s something else.You and/or your parents might “invest” in your education, for example, because getting a degree will create a better future for you. The return your parents get is mostly the satisfaction they get from seeing you succeed. Your return might be a better job, salary, and stability.
For the purposes of this article, however, when I talk about investing I mean investing money with the goal of getting more money.
Will investing make me rich?
Overnight? Nope. Over time? Probably.
Here’s the deal. Despite what movies would have you believe, throwing some money in the stock market isn’t going to make you wake up tomorrow with a yacht, mansion, and more money than you can count. Unless you already have a yacht, a mansion, and almost more money than you can count. Then, maybe.
True investing is all about the long game. It’s about slowly adding to the money you have invested and watching your wealth build over time.
You’d be surprised how thrilling it can be just to know that you have some money working away in the background to make you more money. Really, how cool is that?
Ways to invest
There are countless ways to invest your money. Here are three of the most common ways to invest and some essential facts you should know about them.
The stock market: The stock market is the classic place people think of when they think of investing. When you own shares of stock in a company, you own part of that company and hopefully profit from the success of the business.
The stock market can be a great place for young people, especially, to invest because it historically goes up over time, which means you make money over the years. It can be unpredictable in the short term, however, which is why people see it as scary.
The bond market: When you buy a bond, you are essentially loaning your money to the government or a company for a set period of time. That money gets repaid to you at the end of the agreed period of time, with interest.
Bonds are more predictable than stocks, but tend to produce lower returns. Traditional wisdom says the older you are, the more your investments should be in bonds. This protects your money from the fluctuations of the stock market while still giving you some guaranteed return.
Real estate: Real estate is property like land, houses, commercial buildings, etc. People will usually buy real estate hoping it will increase in value over time. The most common type of real estate for people to own is a place to live like a house or condominium.
Unlike when you buy stocks and bonds, you usually take out a loan, called a mortgage, to buy the property. Then, over 30 years or so, you pay that loan off. Real estate can be a good investment if property prices go up. It can also be a terrible one if those prices drop. Never invest in real estate without having a plan and research to back up your choice.
Most of us will invest in a mix of the three choices above over our lifetimes. You might decide to invest on your own, or maybe you’ll do it as part of a retirement plan at your workplace, or you could opt for a combination of both.
What is NOT an investment?
Anything that does not appreciate, or gain value, over time should not be called an investment. They are expenses. Some examples are:
Cars: A new car loses about 10% of its value the second it leaves the dealer, and the value of cars generally drops steadily over time.
Clothes/Accessories: No matter what brand name they are, used clothing, hats, and shoes are usually worth very little. On the plus side, if you are a brand junky, you can usually find gently used pieces for way below their new prices.
Diamonds: Sorry ladies (and gents). Diamonds are so not an investment. They may be beautiful, but as anyone who’s tried to resell one will tell you, you will never make money back on a diamond. This is true with most precious stones, but diamonds especially.
Gambling: Even though there’s a tiny, itty bitty chance you could win money from gambling, it is not an investment. Smart investments should always have a higher chance of return than loss, and gambling is ALWAYS rigged to favor the house. Always.
The exceptions to these are, of course, true collectors items or show pieces.
A car from the 1930s is worth a lot if it’s in great shape, for example. Before you go spending money on something you think will be a collector’s piece, however, make sure you do your research about the item and remember that nothing is guaranteed.
If you’re still confused or you want to know more, I’ll address a lot of the terms from this article in separate pieces. Investing does sound scary, but it doesn’t have to be complicated and you don’t have to be a millionaire to invest. However, investing can help you become a millionaire. Just not overnight.