What is Investing?
Investing involves strategically deploying your capital with the anticipation of incremental growth over a specified period. It entails committing financial resources to various assets or schemes with the goal of achieving a positive return. For instance, if you invest ₹10,000 in a scheme for a year and witness an increase to ₹12,000, it signifies not only the preservation of your initial investment but also an additional ₹2,000 in returns. In essence, investing is a methodical approach to allow your money to work for you, generating profits beyond the initial sum invested.
Basic Types of Investing
While there are many investment options available, the three basic types can be categorized based on their risk and return characteristics:
1. Equities (Stocks):
Investing in ownership of companies: You purchase shares of a company, essentially becoming a partial owner.
High potential returns: When the company performs well, the stock price can increase, offering capital gains when you sell. Additionally, some companies distribute profits to shareholders as dividends.
Higher risk: Stock prices can fluctuate significantly, leading to potential losses if the company underperforms or market conditions worsen.
2. Fixed Income (Bonds):
Essentially, loaning money to an entity: You purchase bonds issued by governments or corporations, effectively lending them money.
Lower potential returns: Bonds typically offer fixed interest payments (coupons) and the return on your initial investment upon maturity.
Lower risk: Generally considered less volatile than stocks, with a lower potential for significant losses. However, they are still subject to some risk, such as the possibility of the issuer defaulting on the loan.
3. Cash Equivalents:
Preserving capital and earning some interest: These investments prioritize safety and short-term liquidity.
Low potential returns: Examples include savings accounts, money market accounts, and certificates of deposit (CDs). They offer minimal returns but are considered highly secure and readily accessible when needed.
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