To learn how to invest is like learning how to ride a bike – you just need to know how to ride it and you’ll be fine. In terms of investments, investing means buying an asset with the aim of making a profit or a return in the near future, typically in the next two to five years. This investment will be used to make profits and to cover costs such as ongoing operations, inventory, and investments in capital assets such as plant and property. The profit or return can either be realized through the selling of assets on the secondary market, be reinvested in the company to create new capital, or be reinvested to extend the duration of the existing cash flow.
One of the ways you can earn a profit on your investments is through capital gains, which are realized when sales of an asset and its purchase price (the cost basis) exceed the amount you paid for it. Capital gains are not only realized when sales and purchases are made but also when the asset is sold. A few examples of investing in capital assets that yield returns include renting out property to tenants, accumulating build up capital to buy start-up companies, and building equity to support growth or expand in a business. You should keep in mind, however, that any gain realized from these investments will need to be reported to the tax authorities.
When looking at different investment options, such as investing in shares of stock, bonds, mutual funds, real estate property, and even foreign currency exchange rates, you must consider your long-term goals. If you want to make a hefty profit on your shares of stock and you plan to hold onto those stocks for many years, then real estate property may be a good choice for you. Bonds can earn you money if interest rates fall, but they will usually lose value over time, especially if you are not exposed to interest rate fluctuations. Real estate is inexpensive and if the market rises, the property value will appreciate. Finally, if you have several stocks in a single mutual fund that you do not follow, then you should diversify your asset allocation by investing in other types of stocks.