Published: May 17, 2017 | Updated: August 2, 2020 | Posted by: Moneymax | Personal Finance
Many people use the term ‘investment’ rather loosely for a number of things, despite not knowing what are the basics of investing.
A newly-bought BMW can be labeled as an investment. Buying MAC Cosmetics instead of the local brand is often considered an investment in quality makeup. You might even be guilty of ‘investing’ on the latest mobile phone.
With these labels, there has been a fine line between the difference of investing and splurging. By learning about the real meaning of investments, you can figure out exactly when a purchase becomes an investment.
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Investopedia defines an investment as “an asset or item that is purchased with the hope that it will generate income or will appreciate in the future.”
Based on this investment meaning, there are two keywords to remember: time and appreciation. The goal of any investment vehicle is to grow your money over time.
Let’s say you are planning to invest in real estate. Simply buying a house to live in cannot be called an investment because it does not automatically generate money.
But if you buy a house with the intention to rent it out, then it becomes a viable investment because it provides you money for your future needs.
There has to be a Return on Investment (ROI) which is a performance measure used to assess how efficient an investment is. The higher the ROI, the more profitable your investment is.
You can choose from a wide range of investment vehicles that best fits your personality and budget. It is best to select an investment based on your goals – short, medium, and long-term – or based on your risk appetite – conservative or aggressive.
Stocks, real estate, businesses, gold – all these are ownership investments which are considered to be the riskiest yet most profitable.
A good example of an ownership investment is stocks. Investing in stocks makes you a part-owner of a company, giving you the right to a portion of the company’s value and income.
Meanwhile, entrepreneurship focuses on the creation of a product or service that you can sell to others, giving you enormous potential returns. You can also use houses and apartments to earn money by renting them out or reselling them.
If you don’t like taking risks, you can try investing in less volatile lending investments.
Bonds – debt obligations issued by companies and treasuries – are a suitable example. The good thing about them is that they pay a set amount over a certain period, regardless of the company’s gains and losses.
While this means that you won’t be left empty-handed, you also won’t be able to take advantage if the company doubles or triples its value. It’s a low-risk but low-profit investment.
Short-term investors would benefit from cash equivalents, which are the least risky of all investment types. An example of this are money market funds, but their return on investment is only at 1% to 2%.
You can use your investment returns to buy a house or a car in the future, your children’s education, your retirement, or as an extra source of income.
Whatever your reason, your investment goals should be clear to you from the beginning to help you make the right investment decisions.
Did you know that you can start investing in stocks with as little as Php5,000? It might seem a small amount, but you can maximize your return on investment by adding money to your investment on a regular basis.
As cliché as it may sound, knowledge is power. If you continue to learn new things about investing, you can make more informed decisions and maximize your profits.
Investment is all about making your money work for you. Knowing what is an investment is the first step towards achieving financial independence.
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.