Before putting money into the market, it helps to understand what actually counts as an investment and what doesn’t. Not every place you store money is designed to grow it, and not every opportunity that promises returns is worth the risk.
What is an investment?
An investment is an asset purchased with the goal of generating income or increasing in value over time. When you invest, you commit money today with no guarantee of future returns, only the expectation that the asset may be worth more later.
Investments can produce returns in several ways, including price appreciation, dividends, interest payments, or other forms of income.
Because values fluctuate, every investment involves risk. Assets can rise or fall depending on market conditions, business performance, and broader economic forces.
Investing vs. saving
While saving and investing both involve setting money aside, they serve different purposes.
Savings accounts are designed to preserve capital and provide easy access to cash. Investments are designed to grow wealth over time, which means accepting more uncertainty in exchange for higher potential returns.
Understanding that difference helps investors choose the right tools for different goals.
Types of investments
There are many ways to invest, each with different risk and return characteristics. Common investment types include:
- Stocks: These are investments in a company's assets and earnings. Investors can buy and sell shares of stocks through brokerage accounts. Stocks can be risky, and it is wise to diversify capital among 25 or more companies with quality underlying businesses.
- Bonds: A debt security that represents a loan to a company or government. Bondholders receive interest payments and the loan amount back on a specific date.
- Mutual funds: A collection of assets, like stocks and bonds, managed by a portfolio manager and designed to meet specific investment goals. Mutual funds have fees, which are deducted from the fund's returns, and invest in a range of companies and industries. Mutual funds are typically actively managed and trade once a day, unlike stocks or ETFs.
- ETFs: An ETF is a collection of assets that trades on a stock exchange. ETFs are similar to stocks and can be bought and sold throughout the trading day. ETFs are made up of a variety of assets, such as stocks, bonds, currencies, and commodities. Index ETFs tack the performance of an index, such as the S&P 500, while sector and industry ETFs provide exposure to a specific industry, like tech.
- Real estate and REITs: A real estate investment trust (REIT) is a company that owns and manages income-generating real estate. Many REITs are publicly traded, allowing investors to diversify their portfolios by investing in a variety of properties.
The pros and cons of investments
Investing can be an effective way to build long-term wealth and generate income. A diversified portfolio allows investors to participate in economic growth across different markets and industries.
However, investing also requires patience and discipline. Returns aren’t guaranteed. Markets experience ups and downs. Speculative strategies, market timing, and investing in assets you don’t understand can increase the risk of losses.
Choosing investments that fit your goals
Before investing, it’s important to understand:
- Your financial goals
- Your time horizon
- Your risk tolerance
The Motley Fool recommends a long-term, buy-and-hold approach rather than frequent trading. Many successful portfolios combine different types of investments, such as growth, value, and dividend-focused stocks, alongside other asset classes.
How people buy investments
Most investments are purchased through brokerage accounts, retirement plans, or employer-sponsored accounts like 401(k)s. Before putting money to work, investors should have a plan and understand how each investment fits into their broader financial picture.
Before choosing specific investments, it’s useful to understand what investing means and why time and patience matter.
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