Investing 101: What is Investing, Anyway?

Have you ever watched a golf tournament on TV and been dumbfounded by the commercials? These events seem to attract a lot of financial advertisers, who use words like “security,” “future,” and “experience” in their messages. That sounds great, I guess. But what does it all really mean?

You’ve probably figured out over the years that these companies have something to do with financial planning, and that many of them are investment firms. But that doesn’t help us much. What exactly do these companies do? Why would you need their services? And what does any of it have to do with golf?

The idea of investing can seem like a pretty hazy thing to many of us. Unless you went to business school, there’s a good chance that you were never formally taught about things like the stock market, mutual funds, retirement accounts and so forth. Somewhere along the way, perhaps you were supposed to figure it all out. But if you didn’t, that’s okay. Over the next series of articles, we’re going to help you make sense of investment, and the impact that it can have on your financial life.

So, what is investment, anyway? In its most simple form, investing is using the money that you already have to get more money.

That sounds good. But for many of us, it can be a somewhat foreign concept. We grow up learning that the way to earn money is to work. We know how to get money using our time, our sweat, our labor and our knowledge. We’re comfortable with this part of capitalism that tells us that when we work, we get paid.

There’s more to capitalism than work-for-pay, though, and that’s where investing comes into play. Picture it like this: Every business out there needs some money to operate — cash to buy the inventory that they will sell, money to buy a delivery vehicle, or funds to pay for research and development. There are lot of business people out there who have great ideas, and are willing to work hard to turn their ideas into success. What they don’t have, though, is the money (or “capital”) that they need to get the business started, or to grow their operations to the next level.

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So, on one hand, you have a bunch of business people with ideas, work ethic and time… and they need money. Then on the other hand, you have a bunch of people who don’t have business ideas or time for a second job, but they do have some money. So the business people say, “If you let us use your money to get our business going, we’ll give you some of our earnings once we start earning a profit.”

When a person with money gives that money to someone to use in their business, that’s an investment. The investor hopes that the business will be successful. If it is, the investor will get his initial investment back, plus some extra money out of the company’s profits. If the company fails, though, the investor will lose the money he invested. This creates some risk, but the potential to earn extra money (without doing any extra work) makes investors willing to take that risk.

That’s an extremely simplified explanation of what investment is. So what does it have to do with you? Well, investment is one of the best ways to turn a little bit of money into a lot of money. We’ve already talked about some of the things that you can do with investment (like planning for retirement, college education or charitable giving). We’ll talk later about the best ways to accomplish these things.

In the next articles in this series, we’re going to examine some of the most popular forms of investments such as stocks, bonds, real estate, mutual funds and other things that rich guys talk about on the golf course. But for now, remember — investment isn’t just for golfers. Start getting comfortable with the idea of investing, and it can make a profound impact on your financial life.

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Photo by Stepleton. Used under Creative Commons License.

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