The goal of an investment is to generate growth that beats inflation with the right investments. An investment can take the form of an asset, item or type of financial product. However, there is also the potential to get back less than you initially invested, or even lose all of it. We’ll talk more about the risks involved with investments later in this article.

How does investing work?

Investing is all about generating capital gains which is a return or profit from the investment. This happens when you invest in an asset and sell it at a higher price. The capital gain is the difference between the amount you invested and the amount you received from selling your asset.

If an asset grows in value, it is considered an appreciating asset. If it falls in value, it is known as a depreciating asset. An asset can be anything of value. Many will consider property, rare metals, or shares as assets. However, they are not limited to just this, and we can consider items such as rare comic books or trainers as investments. 

What can I invest in?

Shares

It is possible to invest in companies that are publicly listed on leading stock exchanges, such as the London Stock Exchange or the New York Stock Exchange. Investing in shares of a company gives you partial ownership of its business, ensuring legal rights to its gains (and losses). Certain stocks listed on stock exchanges will pay annual dividends, which are a percentage of their annual profits.

Commodities

Precious commodities such as metals (gold and silver), energy products, agricultural products (e.g., wheat) and oil fall under the umbrella of commodities for investment. The price of commodities is based on supply and demand. When demand is high and supply is weak, the value rises. When demand is low and supply is strong, the value levels or declines. The cost of holding precious commodities is often prohibitive for the everyday investor. That is why commodities are often traded using contracts for difference (CFDs), where investors can trade the value of a commodity without having to own the underlying asset.

Cryptocurrencies

Cryptocurrencies are increasingly popular, particularly among millennial and Gen Z investors. That is because the potential returns on investing in cryptocurrencies are significantly greater than with most stocks and commodities. It is not uncommon for a cryptocurrency to experience swings of 10% or more in its value in just 24 hours. However, that volatility brings inherent risk for newcomers to cryptocurrency investing. Beginners should learn about the dynamics of cryptocurrencies before investing.

Bonds

Investors can acquire bonds, which are effectively a share in a company’s or organisation’s debt. Investors in bonds receive periodic interest payments for committing funds up front. Once the bond matures, investors also receive their initial investment back in full.

Mutual funds

A mutual fund is one way to immediately diversify your investment risk. Most mutual funds contain hundreds, if not thousands, of assets in a single fund. These assets are spread across multiple industries and asset classes. They are actively managed, so investors are required to pay an ongoing management fee to their broker.

Exchange-traded funds (ETFs)

ETFs are similar to mutual funds, but they do not require as much hands-on management. While mutual funds attempt to outperform a benchmark index, ETFs typically attempt to mimic the performance of a benchmark index. With no ongoing management fees, ETFs are cheaper to invest in and hold as part of your investment portfolio.

How risky is investing?

There is always an element of risk when it comes to investments. The key is understanding the varying levels of risk that you can incur. Different assets have different risk levels and it is important for you to figure out your risk tolerance before you invest in an asset.  One way of mitigating risk is by diversifying your portfolio with a healthy balance of low- and high-risk investments.  

If you think you will struggle to cope with losses, consider safer investments that can handle crises such as global recessions and the recent COVID-19 pandemic. For instance, the S&P 500 Index in the US has been averaging annual returns of 10% in the last century — despite multiple recessions and depressions.

Start investing for the future with eToro

Historically, investing in stocks has delivered substantial long-term returns for investors. Investing in stocks can also help safeguard your personal wealth against issues such as inflation. Further still, it is possible to start an investment portfolio with a relatively small amount of money. If this investing definition has got you thinking about building a portfolio of stocks to invest in, open an account on eToro today and start taking advantage of 0% commission when investing in the world’s leading stocks.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Cryptoasset investing is highly volatile and unregulated in some EU countries. No consumer protection. Tax on profits may apply.

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Cryptoassets are unregulated & highly speculative. No consumer protection. Capital at risk.