It is often said that money is earned through blood, sweat, and tears. Without hard work, it would be difficult for someone to make a livelihood, let alone indulge in their desired luxuries. What if it was possible to earn money with strategic thinking instead? Investments allow people to buy ownership of a company - called stocks - in order to make money for themselves by sharing that company’s profit. With careful research, critical analysis, and sufficient time, an investor can use a business’s success to their benefit without ever having to participate in the business itself!
An excellent method for describing the investment process is the lemonade stand analogy. Imagine that your friend wants to start a lemonade stand, but she doesn’t have enough money for supplies. She asks you for help, so you agree to lend her money by investing in her business. At the end of the summer, your friend has made a lot of profit from her lemonade stand and gives you back the money she borrowed, as well as some extra money because you helped her and she can afford to. Soon, word spreads about your friend’s lemonade stand. Because her business was very successful, a lot of other people want to invest in her lemonade stand for next year. Your friend now has more money to spend on supplies, so she can make more lemonade and, subsequently, a higher profit from her lemonade stand. This means that she can pay her investors more money, so the value of her business’s stock goes up. Even though you had to give your friend some money to start the lemonade stand, you ended up earning more money than you lost. This is why many people invest - to gain wealth by making a profit!
Just like this lemonade stand example, people invest their money into real businesses, such as Amazon or Netflix. They do not have to do any of the work after that. Their stocks will automatically increase or decrease based on how much money the company is making. An investor can track the overall trends in the stock market by using measuring tools like Dow Jones, S&P 500, or Nasdaq. Usually, they can withdraw their stock at any time. However, stocks are often taken out after a long period of time - maybe 10 or 20 years later - so that there is more time for the profit to accumulate. Large, prosperous companies have expensive stocks, but they can also give you a big return on your investment. Smaller companies may have less expensive stocks, but they could also give you less money back in return. It is up to the investor to decide where they want to put their money. Many investors buy stocks from a mix of high- and low- risk companies, which is a process called diversification, to balance out the risks of both categories and increase their overall return.
In addition to stocks, people can also invest in bonds as a source of revenue. Bonds are loans to a company or the national government, and they are especially prominent in times of economic distress such as war. While the value of a stock has the potential to change drastically, bonds have a fixed interest rate. This acts as a form of gratitude and offers an appeal to people who might initially be hesitant about lending their money. Buying a bond can be beneficial in the short-term, but their value decreases in the long-term as inflation raises prices and lowers the value of a set amount of money.
A common misconception is that investing is the same as saving money, but this is not true. When you save your money, you are placing it in a secure location so that nothing will happen to it until you take it out at a later time. It is like keeping your change in a piggy bank. The amount of money you have saved will not decrease, but it will not increase by much either. Saving can be helpful to people who want to save money for the short-term, especially if they want to buy a specific item. They will have immediate access to their cash, which can be crucial to creating an emergency fund, and they will not need to take a risk by giving their money away to other people.
On the other hand, investing means lending your money to a business. If that business performs poorly in the stock market, the value of your stock could go down and you could lose your money. However, if that business does well, you can get all of your invested money back along with extra profit. Investing can be more helpful than saving to people who want to make money for long-term goals, such as retirement. Investors should ensure that they do not need immediate access to their funds, and they must be prepared to accept any risks of losing their money. Both investing and saving have their unique benefits as well as distinctive challenges, so it is important to carefully research each option if you are interested in either one of them.
Comments