What Is an Investment?

What Is an Investment?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

An investment is the allocation of resources, often money, with the expectation of generating an income or profit in the future. This includes purchasing assets that are not consumed today but are saved and used in the future to create wealth. These assets come in different forms, such as stocks, bonds, mutual funds or real estate. They have the potential to pay the owner returns in the form of interest, dividends, profit-sharing or capital gains.

Related Questions

1. What are some common types of investments?

Common types of investments include stocks, bonds, mutual funds, real estate, and exchange-traded funds (ETFs). Other potential options can involve commodities, such as gold or oil, or more complex investment vehicles like hedge funds or private equity.

2. What is a return on investment (ROI)?

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Return on Investment (ROI) is a financial metric commonly used to measure the likelihood of gaining a return from an investment. It is a ratio that compares the gain or loss made from an investment relative to its cost. The formula to calculate ROI is: ROI = (Current Value of Investment – Cost of Investment) / Cost of Investment.

3. What is the difference between investing and saving?

Savings are typically money set aside for short-term goals or emergencies and is generally low-risk and earns a modest interest. On the other hand, investing is aimed at helping to increase wealth over the long term. This approach can entail more risk but offers the potential for larger returns.

4. What is the risk associated with investments?

All investments carry some risk due to the uncertainties of economic conditions, market factors, and other variables. The risk level varies significantly among different types of investments. Typically, higher-risk investments are associated with greater potential for return, yet also with a greater chance of loss.

5. How can someone start investing?

Getting started in investing can be as simple as opening a brokerage account and choosing investments that align with your financial goals and risk tolerance. It might be beneficial to consult with a financial advisor to craft an investment strategy that caters to your specific needs and situation.