Learn about the basics of financial investments and some of the key terminology that is important to understand. Find out about some of the most common types of financial investments and the unique attributes of each.
Definition of a Financial Investment
Have you ever heard someone talking about stocks, bonds, or mutual funds and were a little confused? Does the mention of investments or financial topics seem overwhelming? Understanding some basic information about financial investments can be a great first step in learning how to invest, knowing your path to retirement, or maximizing the rate of return on your money.
A financial investment is an asset that you put money into with the hope that it will grow or appreciate into a larger sum of money. The idea is that you can later sell it at a higher price or earn money on it while you own it. You may be looking to grow something over the next year, such as saving up for a car, or over the next 30 years, such as saving for retirement.How you invest these dollars can be very different. How much time you have on your side is often a key thing to consider when making a financial investment. The more time you have, the more risk you can usually take. The more risk you take, the more potential for making more money! It is important to note that there is also an economic definition of financial investments that deals with how businesses invest in products, equipment, factories, employees, and inventories.
This lesson will focus on the finance definition of financial investment. Let’s look at a few key terms worth knowing when it comes to financial investments.Appreciation is the amount an investment grows in value.
For example, you buy a share of stock for $10, and a year later it is worth $15; the stock has appreciated $5.Dividends are usually cash payments that are paid out on financial investments based on the success and earnings of a company. For example, you invest in Microsoft stock, and it may pay you a dividend of $5 a share. If you owned 500 shares you would get paid 500 * $5 which is $2,500!Interest is the fee a bank, institution, or government pays you for loaning them money through the purchase of a CD or bond. You can also earn small amounts of interest on a checking or savings account.
For example, you may have $10,000 in government savings bonds that pays 5% interest annually; that adds up to $500 a year!
Types of Financial Investments
CDs stand for certificates of deposit and are certificates that earn interest over a set amount of time. They usually range from 30 days to 5 years and are issued most often by banks. These are extremely low risk.Next, we’ll cover bonds. When you purchase a bond, you are lending out your money to a company or government entity. They pay you interest on your money and eventually pay you back the amount you lent out.
In general, these are slightly more risky than CDs but provide a better return or interest rate.Stocks are ownership interests in part of a company. When you buy stock in Walmart, Google, or Starbucks, you are becoming part owner of the business. This allows you to potentially receive profits that the company allocates to its owners.
Those profits are dividends. A stock can also appreciate in value, based on the success of the company. These are higher risk but have good long-term potential to make bigger profits.Mutual funds are often a pooled collection of stocks and bonds that are overseen by a professional manager. Mutual funds often usually focus on a specific type of investment, such as small companies, large companies, bonds, or real estate Mutual funds can appreciate in value and can pay dividends, as well.
These can have high and low risk, depending on the type of fund you invest in.Gold is a precious metal that you can invest in. It is often a small part of a portfolio that appreciates over time. It is thought to be a form of financial protection, in lieu of cash. You can also invest in silver, copper, and other metals. Over the long-term, precious metals are fairly low risk; in the short-term, they can be very volatile in value.When you purchase your first condo or loft in the city, you are investing in real estate.
A real estate investment could also be the purchase of land or a rental property that you can charge rent on and make money. Like precious metals, real estate investing is slightly more advanced in nature. Real estate can be high or low risk, depending on the specific situation.
Examples of Financial Investments
Buying a home may be one of the biggest financial investments you ever make. Another example of a financial investment includes the gold coins your friend bought off the television commercial. In addition, participating in your company retirement plan at work, often a 401k or 403b, allows you to make financial investments in mutual funds.
These can also be done in individual retirement accounts (IRAs). Similarly, when parents set up and contribute to a college 529 savings plan, they are making financial investments in mutual funds, bonds, and stocks for their children’s future college tuition.
A financial investment is an asset that you put money into with the hope that it will grow or appreciate into a larger sum of money. A few of the most common types of financial investments are CDs and bonds, which pay interest to the owners. A person can also make financial investments in stocks and mutual funds, which can appreciate in value and pay dividends. These are often held in individual and company retirement accounts. Two slightly more advanced investments are real estate and gold, which can appreciate over time.
These two investments require a little more advanced knowledge of investing but can be a great way to diversify your portfolio.
Related Vocabulary Terms ; Definitions
|Financial Investment||An asset that money goes into with the hope that it will appreciate into a larger sum|
|Appreciation||The amount an investment grows in value|
|Dividends||Cash payments that are paid out on financial investments based on success and earnings of a company|
|Interest||The fee that a bank, institution, or government pays for loaning money through the purchase of a CD or bond|
|CDs||Certificates of deposit that earn interest over a set amount of time (30 days to 5 years)|
|Bonds||When you purchase a bond, you are lending out your money to a company or government entity that pays you interest on your money and eventually pays you back.|
|Stocks||Ownership interests in part of a company|
|Mutual funds||A pooled collection of stocks and bonds overseen by a professional manager|
|Gold||A precious metal that can be invested in|
|Real estate||Land or rental property that one can charge rent on and make money|
Once you finish watching the financial investment lesson, demonstrate your readiness to:
- State the purpose of a financial investment
- Recite the definitions of relevant terms
- List several kinds of financial investments
- Give a few examples of financial investments