While the concept of investing has existed for thousands of years, investing in its current form can trace its roots to the period between the 17th and 18th centuries, when the development of the first public markets connected investors to investment opportunities.
The Amsterdam Stock Exchange was founded in 1787, followed by the New York Stock Exchange (NYSE) in 1792.
Industrial Revolution Investing
The industrial revolutions of 1760–1840 and 1860–1914 resulted in greater prosperity that allowed people to save and invest, spurring the development of an advanced banking system.
Most of the established banks that dominated the investment world began in the 1800s, including Goldman Sachs and JP Morgan.
Investing in the 20th century
The 20th century saw new foundations in investment theory with the development of new concepts in asset pricing, portfolio theory and risk management.
In the late 20th century, many new investment vehicles were introduced, including hedge funds, private equity, venture capital, REITs, and ETFs.
In the 1990s, the rapid spread of the Internet made online trading and research capabilities accessible to the general public, completing the democratization of investing that had begun a century earlier.
Investing in the 21st century
The bursting of the dot.com bubble – a bubble that created a new generation of millionaires from investing in technology-driven and online business stocks – began in the 21st century and perhaps set the scene for what was to come.
In 2001, Enron’s collapse took center stage, with full exposure of the fraud bankrupting the company and its accounting firm, Arthur Andersen, as well as many of its investors.
One of the most notable events of the 21st century, or history for that matter, was the Great Recession (2007-2009) when failed investments in mortgage-backed securities crippled economies around the world.
Well-known banks and investment firms went under, foreclosures rose and the wealth gap widened.
The 21st century opened up the world of investing to novice and unconventional investors by saturating the market with discount online investment firms and free-trading apps like Robinhood.
Investment vs. Speculation
Whether buying a security qualifies as an investment or speculation depends on three factors:
- Amount of risk taken: Investing usually involves less risk than speculation.
- Investment holding period: Investments generally involve a long holding period, measured in years; Speculation has a very short holding period.
- Source of return: Appreciation may be a relatively minor part of an investment’s return, while dividends or distributions may be a major part. In betting, price growth is usually the main source of returns.
Since price volatility is a common measure of risk, stable blue-chips are much less risky than cryptocurrencies.
Thus, buying a dividend-paying blue chip with the expectation of holding it for several years would be a worthy investment. On the other hand, a trader who buys cryptocurrency is clearly speculating to flip it for a quick profit in two days.
Examples of return on investment
Suppose you bought 100 shares of XYZ stock for $310 and sold them a year later for $460.20. What was your estimated total return, ignoring commission?
Remember, XYZ stock does not issue dividends. The resulting capital gain would be ($460.20 – $310)/$310) x 100% = 48.5%.
Now, imagine that XYZ issued a dividend during your holding period and you received a dividend of $5 per share.
Your estimated total return would then be 50.11% (Capital Gains: 48.5% + Dividends: (500/$31,000) x 100% = 1.61%).
How can I start investing?
You can choose the do-it-yourself route, choose investments based on your investment style, or seek the help of an investment professional such as an advisor or broker.
Before investing, it is important to decide what your preferences and risk tolerance are. If risk-averse, picking stocks and options may not be the best choice.
Develop a strategy outlining how much to invest, how often to invest, and what to invest in based on goals and priorities.
Before allocating your resources, research the target investment to ensure it aligns with your strategy and has the potential to deliver the desired results.
Remember, you don’t need a lot of money to get started, and you can make changes as your needs change.
What are some types of investments?
There are many types of investments to choose from. Perhaps the most common are stocks, bonds, real estate, and ETFs/mutual funds.
Other types of investments to consider include real estate, CDs, annuities, cryptocurrencies, commodities, collectibles and precious metals.
How can investing make my money grow?
Investing is not reserved for the rich. You can invest a nominal amount.
For example, you can buy low-cost stocks, deposit small amounts in an interest-bearing savings account, or save until you have a target amount to invest.
If your employer offers a retirement plan, such as a 401(k), set aside a small amount from your paycheck until you can increase your investments.
If your employer participates in matching, you will realize that your investment is doubled.
You can start investing in stocks, bonds and mutual funds or open an IRA. Starting at $1,000 is nothing to sneeze at.
A $1,000 investment in Amazon’s IPO in 1997 would yield millions today. This is largely due to multiple stock splits, but it doesn’t change the bottom line: Numerical return.
Savings accounts are available at many financial institutions and usually do not require large sums of money to invest.
Savings accounts typically don’t boast high-interest rates; So, shop around to find the one with the best features and most competitive rates.
Believe it or not, you can invest in real estate with $1,000.
You can’t buy an income producing property, but you can invest in such a company.
A real estate investment trust (REIT) is a company that invests in real estate and manages it for profit and income.
With $1,000, you can invest in REIT stocks, mutual funds or exchange traded funds.
Is investing the same as gambling?
No, there is a big difference between gambling and investing.
Investing means you put your money to work on projects or activities that are expected to have a positive return over time – they have a positive expected return.
Gambling is betting on the outcome of an event or game. Your money is not put to work at all. Often, gambling has a negative expected return.
An investment may lose money, but it will do so because the project fails to deliver. Gambling, on the other hand, results from pure chance.
Investment is the allocation of resources to generate income or profit.
The type of investment you choose may depend on what you want to gain and how sensitive you are to risk.
Assuming low risk generally yields low returns and vice versa for assuming high risk. Investments can be made in stocks, bonds, real estate, precious metals and more.
Investments can be made with money, assets, cryptocurrencies or other means of exchange.
There are different types of investment vehicles such as stocks, bonds, mutual funds and real estate, each with different levels of risk and rewards.
Investors can invest independently without the help of an investment professional or enlist the services of a licensed and registered investment advisor.
Technology has also given investors the option of receiving automated investment solutions through roboadvisors.
The amount, or money, required to invest depends on the type of investment and the financial status, needs and goals of the investor.
However, many vehicles have lowered their minimum investment requirements, allowing more people to participate.
Regardless of how you choose to invest or what you invest in, research your goals, as well as your investment manager or platform.
There is a great nugget of wisdom from veteran and accomplished investor Warren Buffett, “Never invest in a business you cannot understand.”