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Simply stuffing money in your mattress wont cut it, either.
Between taxes and inflation, the current value of money is constantly being eroded.
Investingworks by purchasing securities like stocks and bonds that can provide a return on your money.
What Does Invest Mean?
For these purposes, it wouldnt be prudent to take on risk, making longer-term investments appropriate.
Compound interest, which Albert Einstein called the eighth wonder of the world, is another important investment principle.
Compound interest is the greatest single contributor to the long-term growth of investments.
It refers to earning interest upon interest, which can significantly boost your returns over time.
In the third year, you will earn $12,100, and so on.
Over time, compound interest can greatly accelerate your gains.
What Is an Investment?
Investment Definition in Finance
Investments are assets purchased to generate future income or profit.
They play an important role in how companies use and generate money to grow and expand.
Alternative investments could offer growth through other means, such as the rising demand for a commodity or collectible.
Cryptocurrency
Cryptocurrenciesare digital assets that are just emerging as an asset class.
Alternative Investments
This is a catch-all phrase for investments outside of traditional assets listed above, except for cryptocurrency.
It also means youll need to earn 100% on your money after that loss just to break even.
How Investments Generate Returns
Investments generate returns in two broad ways: capital appreciation or income.
Capital appreciation refers to the increase in price of an asset.
Income can come in the form of dividends or interest.
Why People Invest
Every person has their motivation for investing.
This is particularly true for younger investors or those looking to build a nest egg for retirement.
Investments offer the opportunity for capital appreciation and compound growth that can beat inflation and generate significant wealth.
Thats why building a retirement nest egg is the primary financial goal for most investors.
This is why growing your money over time is so important.
Real-World Examples of Investments
1.
Investing in Stocks
The S&P 500 has posted a long-term average annual return of approximately 10%.
Real Estate Investment
Investors buy property for rental income and appreciation.
Bonds for Stability
Fixed-income investments like bonds provide more consistent returns than the stock market.
Bonds guarantee regular interest payments and the return of the principal at maturity.
Bonds can therefore help stabilize an otherwise volatile portfolio, even if your investment objective isnt income.
Risks and Challenges in Investing
All investing involves taking on some level of risk.
Youll have to understand how market volatility and price fluctuations may affect your investment before you make it.
Numerous other risks can affect your investments as well, including inflation risk and interest-rate risk.
Interest-Rate Risk
Interest-rate risk refers to the drop in value that bonds sustain when market rates rise.
Diversify Your Investments
To help reduce risk in your portfolio, you should diversify your investments.
Diversification refers to owning different types of assets that dont move in lockstep.
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