What Is Investing? How to Invest Well and How It Differs from Speculation

Investing is the act of allocating resources in the expectation of a return. In most cases, that resource is money. You might invest money in a business, or you might put money into the stock, crypto, or real estate market so you can sell later at a higher price.

In this post, we'll take a detailed look at the concept of investing, which has become an essential activity for people today living in a capitalist society. If you read all the way to the end, I think it will help you with your future investing.

What Is Investing? The Core of Investing Summarized

Investing seems like such a simple and obvious concept, yet not many people truly understand it. Unlike the superficial explanation of 'allocating resources (money) to make money,' in investing it's important to understand 'the relationship between risk and return'.

Fundamentally, every investment is premised on 'future profit'. What we need to think about here is the concept of time called the future. Simply put, there is a 'risk' that we can't know what will happen going forward. Whether your investment succeeds or not is something you can only know once time has passed.

In investing, risk and return are two sides of the same coin. They're inseparable: when risk is high, you can expect a high rate of return, while when risk is low, the rate of return is often low as well. This is easy to understand if you think of skyrocketing stocks or small, obscure altcoins. Their risk is high, but you can expect relatively high returns. On the other hand, something like a savings deposit has low risk and a low return.

The highest-risk products are known to be commodities and derivatives, while the lowest-risk product is the savings deposit. In between, there are bond investing, stock investing, real estate investing, art investing, and more.

In this way, the core of investing is identifying and analyzing the relationship between risk and return.

Various Types of Investments

As mentioned earlier, any act of allocating resources can be considered investing, but the investment products commonly found in capitalist societies can be categorized as follows. Here, we'll just take a quick look at the list.

• Stocks
• Bonds
• Funds
• Investment trusts
• Options and derivatives
• Commodities
• Real estate(?)

How to Invest

Today, you can invest in three main ways.

1. Direct individual investing

This means investing your own money yourself. It's the method most investors choose, and it has the advantage of not having to pay broker fees, but the downside is that your investing may not be done in a professional way. In other words, you could end up with bigger losses than you expected. So if you invest directly, thorough research and study are a must.

1. Entrusting an asset management company

Investors can also invest through an asset management company. Because they invest professionally, they often promise a certain level of return. However, they charge relatively high fees on profits or trades.

1. Using a robo-advisor

Some investors use robo-advisor investing based on algorithms and artificial intelligence. It's investing grounded in big-data analysis, and it lets you invest with lower fees than an asset management company. However, it hasn't become very widespread yet.

The Difference Between Investing and Speculation

Finally, let's look at investing versus speculation. They can be distinguished by three main factors.

• Risk tolerance: Investing involves lower risk tolerance than speculation
• Time horizon: Investing is carried out over a longer period than speculation
• Source of returns: In investing, dividends or long-term value creation may matter more than price prediction, but in speculation, changes in an asset's price are the main source of returns.

As you can see, investing and speculation can be distinguished by risk tolerance, time horizon, and source of returns. One thing I'd like to point out is that investing isn't always good and speculation isn't always bad. Both investing and speculation are done in the expectation of future profit; the only difference is the method.

Wrapping Up

That covers the concept and types of investing, how to invest, and how it differs from speculation. The core of investing is understanding the relationship between risk and return. Investment products include stocks, bonds, funds, and more, and individuals can invest in them directly or go through an intermediary. Finally, we can sum up investing as an activity carried out over a relatively longer period than speculation while pursuing lower risk.