Investing

Investing Basics

Learn how investing works and understand key concepts such as investments, returns, risk, portfolios, diversification, stocks, bonds, and ETFs.

What is investing?

Investing means putting money into assets with the expectation that they may increase in value, generate income, or both over time. People invest for different financial goals, such as building long-term wealth, preparing for retirement, or growing money for future needs. Unlike money held in many savings products, investments can increase or decrease in value, and investment returns are not guaranteed.

Understanding a few key investing terms can make it easier to see how investments work. These concepts explain how investments may produce returns, how risk affects investing, and how multiple investments can work together in a portfolio.

Investment

An asset or financial product purchased with the expectation that it may increase in value, generate income, or both over time. Investments can produce gains, but they can also lose value.

Asset

Something that has economic value and can be owned. In investing, assets can include stocks, bonds, funds, real estate, cash, and other types of investments.

Return

The gain or loss produced by an investment over a period of time. Returns can come from changes in the investment's value, income it produces, or both.

Capital Growth

An increase in the value of an investment over time. If an investment is later sold for more than its purchase price, the increase in value can result in a capital gain.

Investment Income

Money produced by an investment without selling the investment itself. Depending on the asset, income may come from dividends, interest, rent, or other payments.

Risk

The possibility that an investment's actual results may differ from what was expected, including the possibility of losing some or all of the money invested. Different investments can have different types and levels of risk.

Portfolio

A collection of investments owned by a person or organization. A portfolio can contain different types of assets, such as stocks, bonds, funds, and cash.

Diversification

The practice of spreading money across different investments to reduce dependence on the performance of any single investment. Diversification can help manage risk, but it does not eliminate the possibility of loss.

Common investments

Common types of investments

Investments can take many forms. Stocks, bonds, ETFs, and cash or cash equivalents are some common types of assets investors may hold.

Stocks

Stocks represent ownership in a company. Their value can rise or fall, and some companies may also distribute part of their earnings to shareholders through dividends.

Bonds

Bonds generally represent money lent to a government, company, or other issuer. In return, the issuer typically agrees to make interest payments and repay the principal according to the bond's terms.

ETFs

Exchange-traded funds (ETFs) are funds that can hold a collection of investments, such as stocks or bonds. Shares of ETFs can be bought and sold on stock exchanges.

Cash and Cash Equivalents

Cash and cash equivalents are highly liquid assets that can generally be accessed quickly. They typically have lower price volatility than many investments but may also offer lower potential returns.

Understanding risk and return

Risk and return are closely connected when evaluating investments. Investments with greater potential returns may also involve greater uncertainty and a greater possibility of loss. However, taking more risk does not guarantee a higher return, and investment results can differ from what an investor expects. The amount of risk that may be appropriate depends on factors such as an investor's goals, time horizon , financial situation, and ability to tolerate changes in investment value.

Key takeaway

What should you remember?

Investing involves putting money into assets that may increase in value, generate income, or both. Unlike saving, investment values and returns can fluctuate, and losses are possible. Understanding assets, returns, risk, portfolios, and diversification provides a foundation for learning how different investments work.

Continue learning

Explore the concepts in more detail

Now that you know the basics, explore how ETFs work and how diversification can affect the risk of a portfolio.

ETFs

Learn how exchange-traded funds work and how a single fund can hold multiple investments.

Diversification

Learn how spreading money across different investments can help manage portfolio risk.