Investment basics are about letting your money, home or other asset work to generate income and/or increase your overall net worth. One goal is to receive a return that will beat the rate of inflation which has averaged out to be 3.33% over the past 100 years. Another goal is to experience one of those joyful phenomenons called compound interest and/or increased valuation of an asset that can be surprisingly lucrative if all goes well.
How exactly does compound interest work? It’s about your money growing at an increased rate over time according to a mathematical formula. Yes. Faster. If all goes well, every year your money would be growing at a faster rate than the year before. Once you invest the principal amount, any accrued interest is added to that principal. That means any new accrued interest is based on a higher total amount. And so on. Faster! Mush!
The above scenario is based on ideal market conditions and/or solid investments. If a company goes bankrupt, you could lose most or all of your principal. To further understand investment basics, see for yourself how it’s possible for your investment to grow. Try this excellent investment calculator and check out the possibilities.
Investments come in a variety of flavors and associated risk. It is a general rule that the more risk involved, the more you can make or lose. There is a range of what is considered safe versus risky. The stock market over time has been reported to have average returns of 7-9% depending on the source. Your personal situation including your age, your risk tolerance (level of risk that you are willing to withstand) and market conditions will determine the investments that make sense for you.
Here are some definitions that you need to know.
- Equities – Stock or other security that represents an ownership interest.
- Bonds – A debt investment in which an investor loans money to an entity (corporate or governmental)that borrows the funds for a defined time at a fixed interest rate.
- Mutual Funds – An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets.
More definitions can be found on Investopedia, an excellent financial investment related definition resource. There are other types of investments such as real estate, art, commodities such as gold and more that experience ups and downs. Set your life and financial goals, do your research and know your risk tolerance. If you need to, consult a financial advisor for your personal situation. The possibilities are most excellent~~