What is an Investment?

“What is an investment?” may seem like an obvious question, but the answer isn’t always so obvious.

When asked that question, people often respond with possible examples of investments — things like stocks, mutual funds, or real estate.

But the essence of an investment isn’t the things you put your money into. Instead, it’s the purpose and relative probability of achieving that purpose that makes something an investment.

Of course, the purpose of an investment strategy is to try and make money, usually over an extended period of time, while taking on a certain amount of risk in exchange.

Places you can put your money that have almost no risk aren’t really investments, because the flip side of almost no risk is that there is little or no hope that your money will grow over time. Examples of low-risk places to put your money might be a savings account, money market fund, or a CD. (For CDs, taking advantage of laddering will make them even more low-risk.)

Places you can put your money that are extremely risky aren’t really investments either. Examples of risky things to do with your money might include the roulette wheel, penny stocks, an unknown start-up company, or a get rich quick scheme. Those kinds of things are basically bets, or sometimes scams.

So in order for something to be an investment, there should be a reasonable amount of risk, and a reasonable shot at actually making money gradually over a period of time.

YOU MIGHT ALSO LIKE

4 comments

  • Would consider the purchase of physical gold an investment or gambling? It seems hard to put everything into a label.

    • It is hard to put everything into a label. As far as gold goes, at this point in time I’d lean more toward gambling, because it has skyrocketed so much, and reminds me of the housing market a few years back when everyone under the sun was rushing to buy.

  • To me an investment is anything where you forego consumption today for a payoff in the future. So I would put CDs and money market funds as investments. Granted they are low risk investments but still, to me, in the investment category. More broadly, going to college to increase one’s future productivity is an investment.

    • I agree that going to college can be an investment. I hadn’t thought about the foregoing consumption aspect of things.