What is Investment?
In simple words, investment is acquisition of asset to generate money. For example, if you buy a house and rent it out, then house is your investment and rent is your cash flow income from the investment. Following are the examples of most common investments;
- Purchasing stocks to earn dividends and capital gains
- Issuing the bonds or purchase the bonds of issuers
- Buy a car and rent it out to rent a car company or someone
- Deposit money into savings accounts to earn interest/ profit.
- Buying a house to rent it to someone
What is Stock?
Stock is a guarantee which entitles its holder a piece of ownership in a business/ corporation. Shares are units of stocks and traded in a regulated platform called stock market. Investors can open the account in stock market through the firms known as stock brokers.
Stock is an equity instrument which means that stock holder is entitled to profits of business/ corporation and not the fixed return. For example, buying 1 share of Apple Inc. makes the investor its owner.
What is Bond ?
Bond is an instrument which is issued for the fixed period of time with the original amount along with interest. For example, purchasing Vanguard bond of $100 for 1 year at 5% means getting back $105 after 1 year.
What is dividend?
Dividend is amount of profit that is distributed to the share holder of corporation. Read More.
What is compounding?
Compounding is the most powerful term in investing. It is growth of money year on year by re-investing the returns on original investment. For example, if someone invests money of $1,000 in year 1 and gets $100 at 10% return at the end of year and again reinvests the total money of $1,100, it will become $1,210 at the end of year 2. Compounding has earned $10 additional for the investor and it goes on.
How to choose any investment?
One should consider five important points before making any investment.
- Assess the risk level of investment
- Learn and get an understanding of the investment
- Check the regulations related to that investment
- Review the protection coverage in case of loss/ default
- Seek financial advice after doing your own research