Investment is putting money into assets that may provide financial gains, such as real estate or the stock market. It is different than simply saving money because investing may yield higher returns on your initial investment and help you achieve your financial goals faster than saving alone.
The most common types of investments are stocks, bonds, ETFs, mutual funds and real estate. You can also invest in physical items, such as art, wine, whisky or gold bullion. However, it is important to fully understand what you are buying before committing any capital. Investors should always diversify their investments across many different assets to minimize risk and volatility.
There is a natural trade-off between risk and potential return, as assets with greater potential to increase in value also carry more risk than those with lower growth potential. Younger investors with longer time horizons can often take on more risk, knowing they have more time to recover from periodic declines in volatile assets. Those nearing retirement may shift to lower-risk assets, to help preserve their capital.
One of the key benefits of investing is growing your wealth over time, due to compound interest (which works by reinvesting earnings over time). The earlier you start investing and stick with it, the more your money might grow — especially with the power of dollar-cost averaging, where you invest equal amounts regularly. In addition, by investing in an asset that offers returns that outpace inflation, you can keep your purchasing power ahead of rising costs.