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DEFINITION:
An investment is an asset that an individual or organization purchases with the expectation that it will produce income or profit in the future – examples of investments include stocks and real estate.
Understanding investments
When you make an investment, you exchange resources (such as money or credit) for assets (such as stocks or real estate) in order to derive future benefits. For example, an investor buys stocks in the belief that they’ll increase in value or to receive dividend payments. A student might invest in a college degree in hopes of starting a fulfilling career. People often think of money when they invest, but they may also invest other resources such as time and labor (as a business might). An investment can result in losses if the value of the asset acquired declines or if other benefits realized (such as rent payments on a rental property) don’t meet expectations. Where there’s potential for reward, there’s also risk.
EXAMPLE
Imagine that a few years ago, as the 2014 holiday season approached, you noticed that most of your friends and family members were buying their gifts online. You were convinced that e-commerce was the future, and on Jan. 6, 2015, you bought 10 shares of Amazon stock at $300 per share. Fast forward to February 11, 2020; Amazon stock is selling at a much higher price of $2,150 per share. You decide to sell your shares. The 10 shares you invested in are now worth $21,150 – giving you a profit of $18,500 before taxes, trading fees and other costs are deducted. Of course, hindsight is always wiser; many investments do not always pay off. If you had bought J.C. Penny stock at $7.90 on Jan. 6, 2015, each share would have been worth only about 73 cents on Feb. 11, 2020.
Takeaway
An investment is like planting a seed in a garden…
If you plant a seed in the right place at the right time and nurture it under the right conditions, it can one day grow into something that always gives back. Think of a lemon tree, a strawberry plant or a fragrant flower. Even an investment has the potential to grow into something worth more than what you paid to buy it. But just as a plant can wither, an investment runs the risk of losing money.