What Is Investing?

For some, investing is a way of life. For others, it’s an obscure concept that they’ve never explored. But if you have ever opened a savings account or put money into a retirement fund, you’ve dabbled in investing.

By definition, investing is using our money in certain ways with the hopes that it will make us more money in the long run. For businesses, this often involves purchasing equipment or inventory. For individuals and banks, it usually involves the purchase of financial products.

Take a basic savings account for example. We put money into the account, and the bank adds interest at a specified rate. If we deposit a certain amount of money and leave it there for a year, there will be more money in the account at the end of that year than when we started. This is investing in its simplest form.

There are many types of investments available. They range from very safe to very risky. Some require no minimum amount to get started, while others require thousands of dollars. Here are some of the more common types of investments:

* 401Ks – Most companies that offer employee benefits offer 401K plans. A 401K is a retirement savings fund. Employees agree to have a certain amount withheld from their pay before taxes and put into the fund. Employers often match employee contributions up to a specified amount, and all contributions are invested in a fund of the employee’s choice. The fund is intended to be maintained until retirement, but employees may be allowed to borrow from it. Early distributions result in tax penalties.

* IRAs – These are similar to 401Ks, but they are set up by individuals rather than employers. The money invested has already been taxed unless it is rolled over from a 401K, but there are still certain tax advantages.

* Mutual funds – These funds are made up of different stocks and bonds, and are under the control of professional money managers. This is how many investors get started in the stock market.

* Certificates of deposit – Certificates of deposit, or CDs, require investors to lend money to a bank for a specified period of time. When this time is up, the CD is said to have reached maturity and the investor can withdraw his capital and interest.

* Money market accounts – These are similar to CDs, but investors may withdraw money from their accounts at any time. Higher interest is paid to investors who make higher deposits.

Investing is not just for the rich. There are investment opportunities that virtually anyone can take advantage of, and they are not necessarily complicated. By starting out small and simple, you can get a taste of investing without a great deal of risk. Once you’re comfortable with that, you can move on to investments with greater potential.