Investment is allocating money toward assets that may potentially earn returns in the future, allowing you to meet financial goals like retirement or education costs. Investments may generate returns through capital appreciation (gains or profits) or income, such as dividends or interest.
The concept of investment can be complex, but the basics are easy to understand. Start with defining your goals, then consider how much risk you’re willing to accept. High-risk investments can yield big rewards, but they also carry the potential for large losses. The lower the risk, the more stable your return will be.
For most investors, the best option is to diversify their portfolio by balancing high-growth assets with lower-risk assets. The idea is that when one type of asset loses value, others will make up the difference.
In the case of stocks, for example, investing in a variety of companies can help reduce risk. Large, established companies such as Coca-Cola and Johnson & Johnson typically offer stability, while small firms called small-caps can offer faster growth.
The most common types of investments are equities, bonds, real estate and alternatives. Investors can choose to utilise a range of strategies, such as dollar cost averaging and market timing, to improve their return potential. However, it’s important to remember that any type of investment carries some level of risk.