How Does Investing Work?

What Is Investing?

Investing is a way to increase the amount of money you have by putting it into financial products. These include bank accounts, money market accounts, stocks, bonds, mutual funds, precious metals and property. Anything that potentially increases in value can be an investment.

Why Invest?

Investing helps you accumulate enough money to pay for something expensive. This can be a house, a car, a college education or retirement. Investing makes your money work for you by growing instead of just sitting there. It is important to invest to keep ahead of inflation. Everything gets more expensive over time. If your money doesn't grow, your spending power decreases.

Finding Money To Invest

People often complain that they can't find the money to invest. However, this is usually a matter of priorities. Investing is essential for financial security. Investments provide money in an emergency, allow you to buy expensive things and let you retire. Many employers offer 401(k) plans that deduct money for retirement directly from your paycheck. This is an excellent way to invest. It is a good idea to reserve a portion of each paycheck for investing. Think of it as another bill and pay yourself first.

Where to Invest

The simplest way to invest is at your local bank. A checking account allows you to pay your bills while a savings account earns you a little interest. When you accumulate a few thousand dollars to invest you can earn more interest with a Certificate of Deposit or money market account. More aggressive investing involves bonds and stocks. These are often bundled together as mutual funds and can be purchased through mutual fund companies. These types of investments involve more risk but have the potential of much greater rewards over time. Precious metals, like gold, and real estate are investments that compliment an already diversified investment portfolio.

How Long to Invest

Time horizon is an important consideration when investing. Put money you'll need right away to pay bills in short-term investments like checking, savings and money market accounts. If you have a few thousand dollars that you won't need for several months or years, invest in Certificates of Deposit or conservative mutual funds. If you want your money to provide you income, invest in bonds or stocks paying high dividends. If you have long-term goals like a child's college education or retirement savings, invest in more aggressive mutual funds heavy on growth stocks. A tax sheltered investment like a 401(k), IRA or 529 plan has added tax benefits that increase growth even more.

Risks of Investing

The more aggressive an investment is, the more likely the value will fluctuate. That means the value can fall below what you initially invested. It is possible to lose much or all of your money in a risky investment. The stock market historically evens out over time. If you have time to wait many investments come back. But some don't. Consider this and your time horizon before making any investment.