What is Investing?

Welcome to the Chicago Partners Wealth Advisors Guide to Investment Basics! Maybe you’ve heard or read things about investing that have piqued your interest. Maybe you’re looking for ways to make more money or responsibly handle the money you already have. Or, maybe you just want to learn more about finance and economics. Whatever your motivation is, learning about wealth management can be extremely valuable. At the end of the day, investing is one of the smartest ways to use your money. Read on for a basic breakdown of investing and decide if this path is right for you.

Put simply, investing is the process of using resources to acquire even more resources that eventually increase in value. It’s kind of like splurging on a nice, expensive armchair. You put the money down upfront, but you get a high-quality, comfortable reading nook that lasts a lifetime. You could also think of it like renovating your house. Spending money on those new floors can benefit you two-fold. Along with getting to enjoy your spiffy new hardwood, you’re also adding value to your property. This means you can sell it for more money later.

Have you ever heard the phrase, “You need to spend money to make money”? In a sense, this couldn’t be more true. Investing is the act of buying assets that may appreciate, or increase in value over time. These assets then may provide a return on investment (ROI) to investors in the form of income payments or capital gains. Income payments are one potential form of payments that result from the ownership of assets. Capital gains are the profits earned from the sale of an asset that has increased in value. Essentially, investing is spending money now to make money later.

The main idea behind investing is buying something at a low price and selling it at a higher price, thereby making a profit or a “capital gain.” Selling assets for profit is also called “realizing” your capital gains. As mentioned before, when an asset or investment gains value over time, this is called “appreciating” in value.

You can also invest by owning assets that generate income by themselves. Instead of selling an asset to make profit money, the object of “income investing” is to purchase assets that generate cash flow over time. For example, a property-owner may rent a property out to tenants. In this situation, the property is providing cash flow for the owner.

Investing is a broad field with plenty of different subcategories. You can invest in many asset classes, including stocks, bonds, commodities, and real estate. You can also purchase mutual funds and exchange-traded funds (ETFs), in which you’re investing in a combination of assets. Read on to learn more about stocks, bonds, and real estate.

Companies sell stocks, also called equities, to get funding for business operations. A stock is a portion or “share” of ownership in the company. In other words, when you invest in a stock, you own a part of the company, and you’re impacted by both the successes and losses of the business. Some stocks pay dividends, or small payments of a firm’s profits on a regular basis. Stocks are assets that can generate cash flow without the owner having to play a very active role.

Companies issue bonds when they need to gain capital. Think of bonds as requests for loans. If you invest in bonds, you’re letting someone borrow your money for a certain period of time. In return for you trouble, the borrower pays a “fixed rate of return” in addition to the money you loaned them. By “being the bank” and investing in these fixed-income investments, you can earn money by doing almost nothing. Investing in bonds can be more lucrative than just saving your money.

Real estate investing is one of the most well-known forms of investing. Purchasing homes, buildings, or acres of land is a very popular way to generate wealth. In general, a property’s value will increase over time, but this can also vary based on factors like economic conditions, location, crime rates, and governmental stability.

So, the benefits of investing are pretty obvious- spend money to make money. But what’s the catch? Well, every investment involves a certain level of risk. The amount of risk you’re taking depends on the type of investing you’re doing. In general, the greater the risk, the more money you have the potential to make, and vice versa.

For example, stocks don’t come with guaranteed returns, and the market is unpredictable. While these investments could provide higher returns, they also come with greater levels of risk. In contrast, Treasury securities are thought of as low-risk or risk-free investments, as there’s more of a guarantee that the investor will keep the principal, or initial, investment.

Your “risk tolerance” is the amount of risk you’re willing to take. Some want to take greater risks for greater rewards, while others are okay with slower, smaller returns, if it means their investments are more stable. There are some tried and true methods for minimizing losses and maximizing returns. You need smart risk management strategies to protect your assets. One of the most common of these strategies is diversification, which is the process of creating a well-developed investment portfolio.

Investing is a complex field, but the core idea is pretty simple. Plus, inexperienced investors don’t have to worry. At Chicago Partners Wealth Advisors, our team of financial experts has spent years researching and studying this process, so we can help you through it every step of the way. We want to aid you in reaching your own financial goals. Our experienced professionals have an excellent track record for success, so you can rely on us to get you started on the right path and walk with you on your financial journey.

If you have any questions, please reach out, and we will be happy to assist you.