What Is Investing?
Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains. In a larger sense, investing can also be about spending time or money to improve your own life or the lives of others. But in the world of finance, investing is the purchase of securities, real estate and other items of value in the pursuit of capital gains or income.
How Does Investing Work?
In the most straightforward sense, investing works when you buy an asset at a low price and sell it at a higher price. This kind of return on your investment called a capital gain. Earning returns by selling assets for a profit—or realizing your capital gains—is one way to make money investing.
When an investment gains in value between when you buy it and you sell it, it’s also known as appreciation.
- A share of stock can appreciate when a company creates a hot new product that boosts sales, increases the company’s revenues and raises the stock’s value on the market.
- A corporate bond could appreciate when it pays 5% annual interest and the same company issues new bonds that only offer 4% interest, making yours more desirable.
- A commodity like gold might appreciate because the U.S. Dollar loses value, driving up demand for gold.
- A home or condo might appreciate in value because you renovated the property, or because the neighborhood became more desirable for young families with kids.
In addition to profits from capital gains and appreciation, investing works when you buy and hold assets that generate income. Instead of realizing capital gains by selling an asset, the goal of income investing is to buy assets that generate cash flow over time and hold on to them without selling.
Many stocks pay dividends, for example. Instead of buying and selling stocks, dividend investors hold stocks and profit from the dividend income.
