It seems that wherever you turn, there is talk of investing. Co-workers discuss their situations around the water cooler. Financial advisors seem to be in every strip mall, and just a few minutes of flipping through the 24-hour news networks will undoubtedly find stock tickers and features on financial markets.
But how much does the average consumer really know about investing? Many of us share the same questions but feel uncomfortable asking other people about it because it seems like everybody else already knows.
No matter who you are or how you make a living, you have investments. You may not even realize that you have money in various investment instruments, but if you are in a pension or a 401(k) through your employer, you are already an investor in the stock market.
So now is the time to get yourself caught up on what investing is all about. Here's a basic rundown of it.
Investing is using your money to buy some type of asset with the expectation that it will gain value. In time, that increased value will be available for you to withdraw for your own use. So investing is basically a way to help your money grow.
Stocks are a common investment tool, but you don't have to be involved in Wall Street to be an investor. You can own a 10 gram gold bar and be an investor because gold is an asset that grows in value.
Many people wonder why it is necessary to invest. They feel like they should just place their money in an ordinary savings account, draw a modest amount of interest, and be able to withdraw at any time. And while you certainly can do that, it's not the best way to grow your money.
Most of us work for 30 years or so, then retire. At that point, we need some means of providing for ourselves financially. And given the ever-longer life expectancy in the United States, it's not uncommon for us to live 40 years after retiring with just 30 years of work. Can you save enough money in 30 years to support yourself for 40 years? No, and that's where investments step in.
Part of the problem with saving for the future is inflation. We all know that a gallon of milk today costs more than it did 20 years ago, and we know that the average earnings of that time are tiny in comparison to what we earn today. Yet if all you do to prepare for retirement is put money in an ordinary savings account, you're living in 2017 on 1987 wages.
So one of the most important things an investment must do first is to outpace inflation. If your investment grows by 4% while inflation is 3%, that's a good start.
But it's not enough. Remember that those 30 years of work must finance 40 years of retirement, so growth is essential. And the easiest way to achieve growth in investments is to purchase things that have a good chance to grow in value.
Certain investments are guaranteed of that. Government bonds are established with a certain interest rate that is backed by the issuing government. These instruments are very secure, but they don't always have high yields.
That distinction belongs to stocks. Buying a share of a stock actually makes you the owner of a tiny piece of that company. If it does well, other investors want shares too, and they bid up the price. That bidding increases the value of your stock, and you can sell it, pocketing the money. In addition, you receive dividends, which are your share of the company's profit, and which can be leveraged for additional growth.
But sometimes stocks fail. A company goes belly-up, and instead of being bid up, its shares plummet in value. There are no guarantees in stocks, so this sometimes happens.
A good middle ground is precious metals. Gold, silver, and platinum have the occasional hiccup, but the overall trend is upward because there is always a demand for these metals–and there is a very limited supply.
Investing is a complicated undertaking. You shouldn't do it without a qualified advisor, but you should definitely take an active role in growing your money so that your time on the job can cover your retirement years.
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