Like most things, investing is a skill that can be learned. In the financial world, it’s not as simple as mastering how to read a swatch of cloth or cook a steak, but it does have some similarities. Both require theory and practice to achieve any sort of mastery over them—both take time and discipline–and both have an inherent level of risk involved.
In this article, we’ll compare investing to cooking a steak and go over some basic investment tips for beginners. We’ll begin with the basics of stocks and securities, then move on to a bit of personal finance theory that can benefit you when it comes time to consider making investments. Finally, we will impart some useful advice that should have been taught in school about how to invest your money wisely from day one.
What is an Investment
An investment is simply something—a resource or cash—that has been used either to produce income or work towards producing future income. More simply put: You put your money somewhere so it will grow into more money at a later date. are objects such as stocks, bonds, mutual funds, certificates of deposit (CDs), and treasury notes. are resources that generate income–your job or business for example.
So the investment is…anything that earns. It can be a stock or bond or CD for example. Or if you plant fruit-bearing trees on your property, their fruits will become an investment when you pick them and eat them in the future after they have grown to maturity. You planted something so it could produce income at a later time—it was an investment! If you buy shares of stock in ABC company today because you expect its earnings to increase over time, then those “shares” are also investments with the potential to create income for you down the road–even though most people call these “securities” and not “investments.”
Investing vs Speculation
The difference between investing and speculating is that the former entails risk (which may generate substantial returns) while the latter entails almost no risk (and therefore very little chance of large returns).
Investing makes sense when you have the time, energy, and resources—especially money to invest. You can afford to lose your investment because it’s only a small percentage of your total wealth. If you “lose” it all, life will still be pretty good for you financially because you still have most of your income stream intact. Investing also makes sense if there are things in life other than financial independence that make you happy–you like having fun with friends or going out on dates, for example. Investing is fun, but it takes time and energy to study, research, and trade. You can take a bath on an investment–you can lose 100% of what you invest—and still, live comfortably because you have other income streams such as your job or business.
Speculation makes sense if there are no good opportunities for investing where the risks are tolerable. Speculation provides returns through very little risk and therefore requires much less study and analysis than “true” investing.