Investment is putting resources, usually money, into something with the expectation of getting more back later.

Key idea: Financial investments aim for a return, which can be capital gains or income, and generally, higher returns come with higher risk.

In the world of finance, the goal of investing is to earn a return on what you invested. This return can come in different forms. You might make a profit if you sell your investment for more than you paid for it; this is called a capital gain. If you sell it for less, it is a capital loss. Sometimes, the value of your investment goes up (or down) even if you do not sell it yet; this is called unrealized capital appreciation or depreciation.

You can also get regular income from your investments. For example, stocks might pay you dividends, bonds might pay you interest, or real estate might give you rental income. If you invest in other countries, changes in how currencies exchange can also affect your returns, either positively or negatively.

A key principle in investing is that higher potential returns usually come with higher risk. If an investment is very safe, its return will likely be low. On the other hand, investments that promise big returns also carry a higher chance of losing a lot of money. Many experts advise new investors to spread their investments across different types, a practice called diversification, which helps reduce overall risk.

Key idea: Investments come in many forms, from traditional stocks and bonds to alternative assets like real estate, commodities, and digital currencies.

There are many ways to invest your money. Some common types of financial investments in today's economies include:

Stocks: When you buy a stock, you own a small piece of a company. This ownership is called equity. These are usually companies whose shares are traded publicly.

Bonds: These are like loans you give to governments or companies. In return, they promise to pay you back your money plus interest over time. Bonds are also traded on public markets.

Cash and cash equivalents: This simply means holding money in a particular currency. You might do this if you plan to spend it soon or if you think the currency's value will change in a way that benefits you.

Real estate: This involves buying properties like houses or land. You can rent them out to earn regular income or sell them later if their value goes up.

Beyond these traditional options, there are also 'alternative investments' such as private equity (investing in companies not on the stock market), other types of loans (like mortgages), commodities (like gold or natural gas), and collectibles (like art or rare coins). Even newer digital assets like cryptocurrency and non fungible tokens (NFTs) are becoming investment options.

“Investments come in many forms, from traditional stocks and bonds to alternative assets like real estate, commodities, and digital currencies.”

Key idea: All investments carry risk, which is the chance of losing money, and this risk is generally higher for investments compared to simple savings.

Every investment carries some level of risk, meaning you could lose some or all of the money you put in. For example, if you put money in a savings account, there is a small chance the bank could fail. If you save money in a foreign currency, its value might drop compared to your home currency, meaning your savings are worth less.

Even physical assets like property have risks. The value of a house can go down, or it might be damaged. Investors try to manage these risks, for instance, by borrowing less money compared to the property's value when taking out a mortgage.

Investments generally have more risk than just saving money. They involve more types of risks and a greater level of uncertainty. For example, investing in a biotechnology company can offer huge profits if a new drug succeeds, but it is very risky because most new drugs do not make it to market. It can take 10 years and billions of dollars to develop just one successful drug.

Key idea: Investment practices have a long history, evolving from ancient lending to modern stock exchanges and pooled investment vehicles.

The idea of investing is not new. Early forms of lending and trade existed in ancient Mesopotamia. Around 1754 BCE, the Code of Hammurabi in Babylon had rules for loans and interest, showing that structured financial arrangements were already in place.

In ancient Rome, people called argentarii and nummularii acted as early bankers, handling deposits, loans, and currency exchange. During the Middle Ages, merchant families in Italian cities like Florence and Venice developed practices for deposits, credit, and bills of exchange, which helped trade grow across Europe.

By the 17th century, global trade led to more recognizable forms of investment. For example, to fund long voyages to Asia, companies like the Dutch East India Company needed large amounts of money. They would ask outside investors to provide capital in exchange for a share of the profits when the ships returned.

A big step forward was the founding of the Amsterdam Stock Exchange in 1602, often considered the world's first modern stock market. It was created to trade shares of the Dutch East India Company, which was the first company to issue publicly traded stock. This helped make Amsterdam a major financial center.

Later, in the late 1700s in the Netherlands, the first investment trust was created. This allowed many small investors to combine their money, spreading their risk across different investments. In the United States, the stock market began with the Buttonwood Agreement in 1792, leading to the formation of the New York Stock Exchange (NYSE) in 1817. By 1865, the NYSE was trading hundreds of different securities, showing how much the market had grown.

Key idea: Value investing focuses on buying assets that are priced below their true worth, using financial analysis tools like the P/E ratio.

There are different approaches, or investment strategies, that people use to decide what to invest in. Here are a few common ones:

Value investing: This strategy involves buying assets that you believe are currently priced lower than their true worth, and selling those that seem overpriced. Value investors carefully study a company's financial reports, looking at things like earnings per share and sales growth, to find these undervalued opportunities. Famous value investors include Warren Buffett and Benjamin Graham.

One important tool for value investors is the price to earnings ratio (P/E ratio). This ratio tells you how much investors are willing to pay for each dollar of a company's earnings. You calculate it by dividing the stock's price by its earnings per share. A lower P/E ratio often suggests a stock is a better value. However, it is important to compare P/E ratios for companies within the same industry, as a 'good' P/E can vary a lot between different types of businesses. Another useful ratio is the price to book ratio (P/B), which compares a stock's price to its net assets, excluding intangible items like brand value. This gives a more conservative view of what you are paying for in terms of physical assets.

Key idea: Growth investing seeks companies expected to expand rapidly, aiming for profits from the increasing value of their stock.

Growth investing: This strategy involves looking for investments that are expected to grow significantly in value or earnings in the future. Growth investors often look at a company's current value and also try to predict its future financial performance. Their main goal is to make money from the stock's price going up, which is called capital appreciation. Growth stocks typically have a higher P/E ratio than other stocks in their industry because investors expect them to grow a lot. This strategy is often best for investors who are comfortable with higher risks and do not need immediate income from dividends.

Thomas Rowe Price Jr. is credited with popularizing growth investing in the 1950s. He believed in investing in 'well managed companies in fertile fields.' A newer form of growth investing is venture capital, where investors put money into privately owned, high growth companies, often startups.

Key idea: Momentum investing involves buying assets that are currently performing well and selling them when their performance starts to decline, based on the idea that trends tend to continue.

Momentum investing: This strategy involves buying stocks that have been performing well recently (showing an 'uptrend') and selling them when their upward movement starts to slow down. Momentum investors believe that stocks that have been consistently going up will continue to do so, and similarly, stocks that have been going down will continue to fall. In a declining market, they might even 'short sell' stocks, betting that their value will drop further.

Instead of looking at a company's business performance, momentum investors use technical tools like trend lines and moving averages to spot and follow these market trends. Experts do not all agree on how effective this strategy is.

Key idea: Dollar cost averaging is a strategy of investing a fixed amount regularly to reduce risk from market volatility and potentially lower the average cost per share.

Dollar cost averaging (DCA) is a strategy where you invest a fixed amount of money regularly, no matter what the price of the investment is at that moment. For example, you might decide to invest $200 every month for three years into a particular stock or fund. This method can be used with any other investment strategy.

Many investors like DCA because it helps reduce the impact of short term ups and downs in the market. By investing regularly, you buy more shares when prices are low and fewer shares when prices are high, which can lead to a lower average cost per share over time. However, a downside is that you might pay more in brokerage fees because you are making many small transactions. Economist Benjamin Graham, in 1949, suggested that investors using DCA are likely to end up with a 'satisfactory overall price' for their investments.

Micro investing is a type of strategy that makes investing easy and affordable, especially for people who are new to it or do not have a lot of money to start with. It allows you to invest very small amounts regularly.

Key idea: Intermediaries like banks and pension funds pool money from many investors to make larger, diversified investments, charging fees for their services.

Many people do not invest directly but instead use financial organizations called intermediaries. These include pension funds, banks, and insurance companies. These intermediaries often gather money from many individual investors and put it into large funds, like investment trusts. This allows them to make bigger investments and diversify more broadly.

When you invest through an intermediary, you have a claim on the assets they buy, but you also pay fees for their services. These fees can vary a lot. Some of the strategies mentioned earlier, like dollar cost averaging, are often promoted by these collective investment funds.

Key idea: Investment valuation involves analyzing a company's financial health using metrics like free cash flow, debt to equity ratio, and earnings per share to determine its attractiveness.

To decide if a company is a good investment, people often look at its valuation. One important measure is free cash flow. This is the money a company generates after paying for its operating costs and investments. A company with high and increasing free cash flow is generally more attractive to investors because it suggests it is profitable and might be able to pay good dividends or interest.

Another measure is the debt to equity ratio. This ratio compares how much a company uses borrowed money (debt) versus its own money (equity) to fund its operations. A high debt to equity ratio means the company relies heavily on debt, which can make it riskier for investors because its earnings can be more unstable. Investors often compare this ratio to other companies in the same industry to get a better sense of a company's financial health.

Earnings per share (EPS) is another way to check a company's profitability. It is calculated by dividing the company's total profit by the number of its outstanding shares. A higher EPS usually means the company is more profitable, which makes it more appealing to investors.