What is an Investment?

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Definition:

An investment is an asset bought by an individual or organization with the expectation that it will generate some future income or profit—Examples of investments may include stocks and real estate.

🤔 Understanding investments

When you make an investment, you trade resources (like money or credit) for assets (like stocks or real estate) in an attempt to gain future benefits. For example, an investor might purchase stocks believing that they’ll appreciate in value or pay a dividend. A student might invest in their education by pursuing a college degree. Investments are often thought of in terms of money, but you can also pay for them using other resources, like time and labor. An investment can produce losses if the acquired asset’s value decreases or if other expected benefits (think of rent payments for a rental property) don’t pan out. Where there’s a potential for reward, there’s also risk.

Example

Imagine that as the 2014 holiday season approached, you noticed that most of your friends and family were buying gifts online. You became convinced that e-commerce was the future, so on Jan. 6, 2015, you bought 10 shares of Amazon at $300 per share. Fast forward to Feb. 11, 2020 and Amazon stock is trading at a much higher price of $2,150 per share. You decide to sell yours. The 10 shares bought for $3,000 are now worth $21,150 — Netting you a profit of roughly $18,000—not accounting for taxes, trading fees, and other costs. Of course, hindsight is 20/20; many investments don’t pan out. For instance, if you had bought stock in J.C. Penny on Jan. 6, 2015 at $7.90 per share, your investment might have declined. Each share would have been worth only about 73 cents on February 11, 2020.

Takeaway

An investment is like planting a seed in a garden...

If you plant a seed in the right spot at the right time, and maintain it in the right conditions, someday that seed may grow into something that keeps giving back. Think of a lemon tree, a strawberry vine, or a fragrant flower. Similarly, an investment has the potential to grow into something with more value than what you paid to acquire it. But just as a plant may wither, an investment carries the risk of losing money.

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Tell me more…

What is an investment?

When you invest, you trade current resources (such as time or money) to acquire an asset that will hopefully generate future benefits. Ideally, if you invest an asset at the right time and place, your investment may potentially gain value. For example, when you invest in the stock market, you typically trade money (an asset) for stocks. There are many different types of assets a person might invest in — Stocks, bonds, commodities, mutual funds, and real estate are just a few common examples. Generally speaking, the idea of an investment is that it can benefit the investor over time.

Think of someone buying a house with the hope that it will appreciate and later sell at a higher price. For many people, an investment offers an opportunity to grow their overall wealth or provide a source of income. It’s also important to keep in mind that all investments come with some level of risk. For example, a stock or property’s value can decline after you buy it.

The meaning of an investment can vary depending on the context. In macroeconomics, an investment refers to goods that are acquired and used in the future to create wealth. A company or individual in one country might invest in business interests in another country, such as setting up a factory (aka foreign direct investments).

What are the types of investments?

Just as you can grow many different types of plants in a garden, you can put your money and other assets into a variety of securities. Depending on the investment, there may be different potential for returns, risks, and other characteristics, such as management fees and tax ramifications. Here’s a look at some examples of investments in the financial world:

Stocks

When you invest in a stock, you’re essentially buying a small piece of ownership in a company. Stocks are kind of like the movie stars of investment instruments — They’re always in the news, and everyone’s talking about them. When people invest in stocks, they tend to do so with the hope that the stock’s price will have increased by the time they decide to sell. Selling a stock at a higher price often means that you’ll profit from the sale (assuming the increase in price was more than enough to cover any trading fees and transaction costs). Some companies distribute profits to shareholders through quarterly dividend payments to owners of common stock.

Bonds

When you buy a bond, you’re lending your money to a government, company, or other borrowing entity. In exchange, your debtor (aka the bond issuer) is generally obligated to repay the debt, plus interest. Companies and occasionally countries are sometimes unable to make their bond payments, however, and default — They don’t make payments to the bond holders. Organizations usually default as a last resort because doing so can scare away investors, making it hard to raise funds. Traditionally, a bond is a fixed-income instrument, meaning it provides payments on a fixed schedule. Bonds typically have an end date (aka maturity date), on which the final interest payment is made and the original amount loaned is paid back.

Other investment categories

There are many other financial investment classes, such as real estate, futures, Certificates of Deposit, cryptocurrency, options, commodities, and more. Before investing in any asset, it’s important to understand the terms, fees, and risks involved.

How does investing work?

All investments require an upfront outlay, usually in the form of money, time, or labor. Ideally, the upfront investment can then grow and later produce a return in the form of higher monetary value or another benefit, but not all investments will result in profits. Typically, investing in a financial product (like stocks or bonds) involves setting up an investment account with a broker or through a financial professional, such as a money manager.

Many people choose to invest in real estate. Let’s say you decide to buy a house not only because you need a place to live, but also because you hope it can later serve as a source of income. After seeing the home’s value appreciate over time, you decide to sell it at a higher price. Or maybe you might decide to rent out the house to another tenant. Either way, the home you invested in may offer value at a later point in time.

Many investments involve business operations. Business investments are often associated with stocks, capital goods, and physical capital. But many companies also invest in human resources. For example, a business might invest in training employees to increase their productivity.

How do I start investing?

Before investing, keep in mind that all investments come with potential risks. It’s important to do your research first — Whether you’re deciding what to invest in or whether to hire a professional to help. It can also help to understand what your investment goals are and your ability to handle risk. Historically, markets have experienced both upswings and declines — And in the past, generally speaking, the stock market has gained over longer periods of time (20+ years). That said, keep in mind that a market’s past performance doesn’t say much about its future performance. And equally important, most investors have not been able to beat the market.

Typically, getting started as an investor in the market involves opening an investment account that allows you to buy and sell shares. Some investors may hire a broker who can execute trades on behalf of their clients by bidding on stocks and other assets. Others may hire a portfolio manager to oversee their investments. It’s always a good idea to do your homework and understand as much as you can about the markets and opportunities you are considering investing in.

What is the importance of investments for economic growth?

Investments may help an investor grow their money, and in turn, their money may help grow a company and the broader economy. For example, a capital market allows a company to raise funds through stock sales and issuing corporate bonds. With that funding, a company could expand their business operations — Like build a new factory, hire more employees, or develop a new product line. All of this can play a role in economic growth, through factors like creating jobs and consumer demand.

Like a company, a government also tries to raise funds by seeking investment, often in the form of bonds. The money raised typically goes toward public projects like paving a new highway or supporting social programs. This helps to stimulate demand. And when people invest in their own education, real estate, or even personal skills and talents, it can help drive consumption. Many individuals use their investments to fund financial goals like retirement.

When people have more income, they may be more likely to spend their money on goods and services, which can help the economy grow. Likewise, when an economy contracts, it’s often correlated with a drop in investments. However, a decline in investments will not always result in an economic contraction. A contracting economy might even spur investment. In fact, public investments often increase during economic contractions as the government tries to stimulate aggregate demand.

Ready to start investing?
Sign up for Robinhood and get stock on us.Certain limitations apply

New customers need to sign up, get approved, and link their bank account. The cash value of the stock rewards may not be withdrawn for 30 days after the reward is claimed. Stock rewards not claimed within 60 days may expire. See full terms and conditions at rbnhd.co/freestock. Securities trading is offered through Robinhood Financial LLC.

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

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Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

Options trading entails significant risk and is not appropriate for all customers. Customers must read and understand the Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount.

Commission-free trading of stocks, ETFs and options refers to $0 commissions for Robinhood Financial self-directed individual cash or margin brokerage accounts that trade U.S. listed securities and certain OTC securities electronically. Keep in mind, other fees such as trading (non-commission) fees, Gold subscription fees, wire transfer fees, and paper statement fees may apply to your brokerage account. Check out Robinhood Financial’s Fee Schedule for details.

Brokerage services are offered through Robinhood Financial LLC, (RHF) a registered broker dealer (member SIPC) and clearing services through Robinhood Securities, LLC, (RHS) a registered broker dealer (member SIPC). Cryptocurrency services are offered through Robinhood Crypto, LLC (RHC) (NMLS ID: 1702840). Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. The Robinhood spending account is offered through Robinhood Money, LLC (RHY) (NMLS ID: 1990968), a licensed money transmitter. A list of our licenses has more information. The Robinhood Cash Card is a prepaid card issued by Sutton Bank, Member FDIC, pursuant to a license from Mastercard®. Mastercard and the circles design are registered trademarks of Mastercard International Incorporated. RHF, RHY, RHC and RHS are affiliated entities and wholly owned subsidiaries of Robinhood Markets, Inc. RHF, RHY, RHC and RHS are not banks. Products offered by RHF are not FDIC insured and involve risk, including possible loss of principal. RHC is not a member of FINRA and accounts are not FDIC insured or protected by SIPC. RHY is not a member of FINRA, and products are not subject to SIPC protection, but funds held in the Robinhood spending account and Robinhood Cash Card account may be eligible for FDIC pass-through insurance (review the Robinhood Cash Card Agreement and the Robinhood Spending Account Agreement).

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