What is an investment?
About this lesson
In this video, you are going to learn what investment is.
What an investment is
An investment is committing money or other resources today in the expectation of getting more back in the future. You give up consumption now (spending the money) in exchange for possible future benefits.
Two things are always involved:
- Time: the money is tied up for a period, from days to decades.
- Risk: the future payoff is uncertain. You might get back more than you put in, or less.
Examples
- Buying shares of a company, hoping to receive dividends and sell later at a higher price.
- Buying a government or corporate bond to receive interest payments.
- A business buying a new machine to produce more goods.
- A student paying tuition (an investment in human capital), expecting higher earnings later.
Investing, saving and speculating
- Saving is setting money aside, often in safe places such as a bank account, where the value hardly changes.
- Investing accepts some risk in exchange for a higher expected return over time.
- Speculating takes on large risks for a chance of large, quick gains, often over short periods.
The line between investing and speculating isn’t sharp. It depends mostly on the risk taken, the time horizon, and how much the decision rests on analysis rather than hope.
Why it matters
Investments are how savings are put to work. At the level of the economy, they fund companies, governments and new projects. For you, they’re how wealth can grow faster than inflation over the long run.