08/06/2021
Definition of a Financial Investment
Have you ever heard someone talking about stocks, bonds, or mutual funds and were a little confused? Does the mention of investments or financial topics seem overwhelming? Understanding some basic information about financial investments can be a great first step in learning how to invest, knowing your path to retirement, or maximizing the rate of return on your money.
A financial investment is an asset that you put money into with the hope that it will grow or appreciate into a larger sum of money. The idea is that you can later sell it at a higher price or earn money on it while you own it. You may be looking to grow something over the next year, such as saving up for a car, or over the next 30 years, such as saving for retirement.
How you invest these dollars can be very different. How much time you have on your side is often a key thing to consider when making a financial investment. The more time you have, the more risk you can usually take. The more risk you take, the more potential for making more money! It is important to note that there is also an economic definition of financial investments that deals with how businesses invest in products, equipment, factories, employees, and inventories. This lesson will focus on the finance definition of financial investment. Let's look at a few key terms worth knowing when it comes to financial investments.
Appreciation is the amount an investment grows in value. For example, you buy a share of stock for $10, and a year later it is worth $15; the stock has appreciated $5.
Dividends are usually cash payments that are paid out on financial investments based on the success and earnings of a company. For example, you invest in Microsoft stock, and it may pay you a dividend of $5 a share. If you owned 500 shares you would get paid 500 * $5 which is $2,500!
Interest is the fee a bank, institution, or government pays you for loaning them money through the purchase of a CD or bond. You can also earn small amounts of interest on a checking or savings account. For example, you may have $10,000 in government savings bonds that pays 5% interest annually; that adds up to $500 a year!
