Importance of Investing Money

Wade A. Barker By Wade A. Barker, 9th Sep 2011 | Follow this author | RSS Feed | Short URL http://nut.bz/3ynto92l/
Posted in Wikinut>Business>Investment

This article will include a description of investing money and why is it important.

Overview

Investing has a definition of the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit, according to Investopedia.com. One of the world’s top mathematicians and physicists, Albert Einstein, has been attributed to saying the most powerful force in the universe is compound interest.


Function

The two ways of investing money consist of active investments and passive investments. Active investment require the investor to take an active role in building and running the investment. These types of investment would include starting a small business and the development of real estate, to name a few. Passive investments allow the investor to participate very little in the investment. These types of investments would include stocks, bonds, and money market instruments. Both types have the design to produce either growth of the initial investment or to produce recurring dividends.

Time Frame

Investors have many different time horizons. Some look short-term (0-1 years), some look medium-term (1-5 years), and others look long-term (5+ years). Most active investments would require the investor to have a long-term investment approach. Also, long-term investor have a passive investment choice too, which would include investing in stocks. A medium-term investor would look mostly at passive investments, such as bonds, or a stock-bond mix. A short-term investor should always look at the short-term choices, as capital preservation emerges as crucial. The short-term investment tools of choice would include money market instruments and short-term bonds.

Warning

Investors must understand that they cannot compound interest off of principle that has disappeared by investing into poor investments. Few investments offer completely safe principle. Banks offer CDs (Certificates of Deposits) that pay out an incremental dividend and provide insurance from the FDIC. While this insurance provides the investor with peace of mind that their principle investment is safe, the insurance comes at a cost. The interest that the CDs pay barely stay ahead of the rate of inflation. Most other investments do not offer such insurance, but provide a higher rate of return for the investor.

Benefits

A prudent, long-term investor can realize the benefit of compound interest. Compound interest occurs when the interest from the initial investment starts to make its own interest. The result provides gain to the investor from money that wasn’t contributed by that investor. Over time, the re-invested dividends and interest can become larger than the initial investment. The Internet provides many different websites to track investment performance.

Considerations

Finding quality investment choices does offer challenges to the investor, but the reward of making superior returns will provide growth to the portfolio beyond even high expectations. Even investment gains of only a few percentage points above expectations will cause the portfolio to double years ahead of the scheduled time. Therefore, wise investment choices become imperative to balance protecting the initial principle and exceeding performance expectations.

Reference:
Investopedia: http://www.investopedia.com/terms/i/investing.asp

Tags

Invest, Investing, Investment, Investment Objectives, Investment Opportunities, Investment Strategy, Investments, Investor, Investors

Meet the author

author avatar Wade A. Barker
Wade Barker has over 15 years of experience in the stock market, the U.S. and world economies. He worked for a technology fund of a large mutual fund company managing $11 billion.

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