The Basics of Investing

Investing is often misunderstood by many individuals. The common definition of investing is actually “an investment in a fixed asset that yields a fixed return”. To make this simpler, you are actually borrowing money from a lender in order to invest in property. For example, you are making an investment in a piece of property and hoping that you will eventually earn a profit from it by renting it out to someone else or even passing it down to your family. In this sense, investing is similar to a bond where you are borrowing money from a third party and re-receiving a certain amount of interest on that money.

In contrast, bonds are an investment type that are usually issued by the government and are not secured by any property. In fact, bonds are considered to be more of an interest bearing investment due to the fact that they are backed by the full faith and credit of a governmental entity such as a corporation, the United States government or a nation state. These types of investments are normally viewed as safer than other investments due to the fact that there is collateral backing them up. However, if the investments perform poorly, the lending institution is not at risk because the investments are guaranteed by some form of federal funds.

Many people view investing in the stock market as the most lucrative way of investing, but when comparing apples to apples, the cost involved in buying shares should really be compared to the cost of paying taxes on capital gains. Capital gains are only taxed once they are realized, so you do not have to worry about capital gains tax at all. When comparing stocks to bonds, one of the main differences is that bonds have limited liability. This means that if the company goes bankrupt, you are not responsible for any debts that the company has incurred. On the other hand, stocks have no such liability limits and are dependent upon what the company does in order to raise funds.