What is an investment? Everything you need to know

Investment definition

An investment is a purchase that is completed with money that has the potential to produce income or a profit. Things that naturally lose value over time and with use are not investments.

An investor is a person or entity who outlays capital in order to produce an income or to make profits. Investing is the act of putting forth capital with the expectation of income or profit. Personal investing is buying financial securities or property for the purpose of making a profit.

What are the main categories of investments?

There are three main categories when you are considering investments. Each category breaks out into various opportunities that may suit your financial plan.

An equity-related investment includes stocks, options, derivatives, venture capital, index funds, and etc.

Low-risk investments include bonds, CDs, and savings accounts. Bonds are when you buy a debt that is expected to be repaid. Since they are considered low risk, they tend to provide a lower reward.

Some examples of cash or cash-equivalents investments include interest-bearing savings accounts or money market funds.

A portfolio is a term that refers to your particular asset collection. It might include the following types of securities:

  • Stocks
  • Bonds
  • Mutual funds
  • Money market funds
  • Exchange-traded funds

Other define investments as including real estate, precious objects, and art. These include things that have the potential to appreciate over time.

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American investors

Approximately 60% of Americans own securities through their IRAs, employer-sponsored retirement plans, or taxable accounts. However, only 30% of Americans own securities in taxable accounts. According to Statista, 55% of Americans are invested in the stock market.

Investment types

There are several different investment types that you should be aware of. Stocks are securities that represent a piece of a company that you own. They are sold by the firm to a shareholder. The business then uses the money it raises to fund its operations. The shareholder receives dividends based on the company’s performance and earnings in the form of monetary compensation.

Common stock is a share that gives you the right to vote you at shareholders’ meetings. By contrast, preferred stock is a share that pays you predetermined dividends amounts but does not give you the right to vote at shareholders’ meetings.

Bonds are types of securities that are generally considered to be low-risk. They allow other entities to borrow money from you and pay you a fixed rate of interest. The government or corporation that owes you the debt repays you when your bonds mature.

A mutual fund contains pooled money from many people. A mutual fund’s money is invested in multiple types of securities, including stocks, bonds, money market funds, and other assets. Index funds are types of mutual funds that stick closely to preset rules. This makes it easier to track specific investments.

Exchange-traded funds are specific types of index funds that try to match the performance of a preselected index such as the S&P 500. Many 401(k) accounts through employers invest in different mutual funds.

Options are investments that are based on potential future transactions. The investors have contracts that allow them to reserve the right to trade in the assets at a later time at a specific price.

Retirement accounts, such as IRAs and 401(k) accounts, are tax-advantaged plans that are designed to help people prepare for their future and for retirement. The accounts can be tied to a variety of investment vehicles that heighten their value.

Real estate investments are purchases of tangible land or property, such as personal homes or commercial lots.

Money market funds have relatively little risk. By law, they invest only in specific short-term, high-quality investments issued by U.S. corporations and federal, state and local governments.

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An alternative investment is a general term that is used for an investment option that is not in the stock, bond or cash category. Real estate investment trusts or REITs are public or private companies that own real property that creates income. Commodities are agricultural products or raw materials that can be bought and sold such as coffee, tea, or oil. Precious metals are metals with a high value that can be bought and sold. This includes gold, palladium, and silver.

Hedge funds are types of alternative investment options. They pool their investors’ money and use multiple tactics to try to provide them with returns. Private equity funds invest directly in companies. They might purchase private businesses or purchase controlling shares of publicly traded companies.


Before you get started, you need to know the different types of investors. Active traders have a goal to make short-term profits through the continual buying and selling of different investment types. The benefits of active trading include that investments are adjusted to align with the prevailing market conditions for managing the investment risk. There may also be short-term opportunities that short-term traders can take advantage of.

Active traders tend to pay high fees because they pay fees per trade and other transactional fees. However, the fees that they pay for trading sticks are low.

Passive traders have a goal of building wealth over time and minimizing their buying and selling. They buy and hold securities and believe in the benefit of long-term ownership. This approach can be highly beneficial, especially when there is good diversification, though this doesn’t protect against a decline in value. The benefits of passive trading include lower costs and greater tax efficiency.

Since they are not constantly buying and selling, passive traders do not have to worry about paying as many commissions and management expenses. Since they hold their securities for the long-term, they generally do not have to worry about large annual capital gains taxes.

Passive traders may pay higher costs if they choose brokerages that charge higher management expenses and commissions. They might pay lower or no costs when they choose brokerages that charge low or no fees to invest. Semi-passive investors choose brokerages that do not charge management expenses or commissions but allow more trading activity such as do-it-yourself investing platforms. Researching online brokerages can also prove beneficial for active traders that want to take control of their investing and reduce their fees.

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Investment risk

Your individual risk tolerance is the amount of variability and fluctuation you can handle in your investments. The higher the risk tolerance, the more aggressive you can be, and the expected rate of return will be higher.

People who are aggressive use a high risk and high reward proposition. For example, a stock with a high investment risk usually has a greater sensitivity to the market as a whole and also has a higher beta. This type of stock consistently experiences larger variations compared to the overall market.

People who have a moderate risk tolerance have a time horizon to invest in longer than five years. Conservative people choose defensive stocks with lower betas because they are somewhat isolated from the impact of broad movements in the market.

Cyclical stocks, on the other hand, are those that are the most sensitive to the underlying economic business cycle. The benefit of buying cyclical stocks is they offer an extra level of protection against detrimental events.

In order to minimize risk, you can utilize asset allocation in your portfolio. This refers to the apportionment of the capital assets in a way that balances the risks and rewards.


Fees are monies that are charged to your account that should appear on your contract and statement. Commissions are charges by brokers in exchange for them placing trades on behalf of the account holders. Management expenses are for managing your securities. Transaction costs are for each time that you buy or sell a security. Annual costs are fees on a yearly basis for keeping your account open.

Various charges can add up and offset returns. It is important to read your statements and be aware of all the brokerage fees. Another fee to watch is the expense ratio. This is an annual fee expressed as a percentage of your investment. It is inherent in mutual funds, exchange-traded funds, and index funds. It can substantially lower your portfolio returns.

Return on investment (ROI)

Your return on investment represents the financial gain or profitability percentage from an investment over a period of time. It is used in finance to compare the efficiency of different investments and is also used in conjunction with other methods of measuring your return. You can also calculate your ROI by using a ROI calculator.

Research your investment

Research helps you to stay informed on investments and the market. To stay current with the most recent information, you should read the best investment books, the best investment bloggers, and the best investment and financial websites.

Be realistic on the performance expectations that you have about the best investments for you. Your expectations and objectives should not be about how to get rich quickly but should instead be focused on how to get rich slowly. You should take a long-term view, and you should invest as early as you can and as much as you can. Many get-rich-quick investments are fraudulent, so you should watch out for them.

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How to get started investing

To get started, you need to determine your objectives and your investment strategy. Know what your financial goals are and what your risk tolerance level is. You also need to know what your cash-flow requirements are, which is how much money you need to fund your investments.

It is also important to know the tax implications of your strategy so that you choose the most efficient approach. Compare the incentives that are offered as well as the costs that are charged by different brokerages.

Look at the services that are offered. Robo-advisors are computer programs that are programmed to advise people who invest based on their financial needs and goals. Robo-advisors are low-cost and minimize the tax losses of people who use them to invest. Clients are able to set and edit their preferences, time horizons, goals, and level of risk tolerance.

Robo-advisors are easily accessible and minimize the potential for human error. They provide investment guidance and portfolio management. Many offer access to human advisors when you have questions. They are good when you are just starting out or if your situation is not complex. The account minimums are very low.

Choose your brokerage firm or transfer to a new brokerage to get started. Complete your application and customize your investments. Make certain that you diversify broadly. Diversification is the act of including different types of asset classes in your portfolio, and it can serve as a hedge against risk.

Select investments that match your objectives and goals. Finally, review and rebalance your portfolio as necessary.

Learning about the meaning of investments such as ETFs and other types is important so that you can get started on your own path. M1 Finance can help you to learn how to identify the best investments as you put together your portfolio.

Smart investors choose M1 Finance

M1 Finance makes it simple for investors who want to take control of their financial future. You are able to get started today for free. Complete the online application and then tailor your portfolio to meet your needs by choosing the securities that you want and assigning percentages to them. M1 Finance does not charge management costs or commissions, allowing you to invest without compromise.

With M1, it costs nothing for you to invest. Much of the process is automated, helping to demystify it. M1’s award winning investment tools enable your money to grow automatically while minimizing the tax burden. M1 Finance gives you the power to learn how to manage your money, conquer diversification, and potentially help potentially earn more.

M1 combines innovative expertise together with advanced technology to help make good financial habits effortless. You can customize your own account of stocks and ETFs or choose from over 80 expertly-created portfolio that is tailored to meet your particular goals and needs. There is no reason to pay someone to build your account when you can build it yourself.

M1 empowers you through the powerful platform which is designed to make investing accessible to all people by providing easy-to-understand access anytime and anywhere. M1 tools save you time by dynamically rebalancing your allocations and automatically reinvesting your dividends. This helps to keep everything on track to help you to achieve your goals.

With free investing, $0 management fees, intelligent automation, and fractional shares, hundreds of thousands of investors use M1 to build their future. Sign up today so you can set your strategy and put every available dollar to work.