For anyone just getting started, investing may seem like an uncertain path. Once you put money in an investment, will it work out? The thought of putting any money at risk doesn’t sit well with some folks, depending on your understanding of investing risk and return.
No one wants to feel like they’re gambling with hard-earned money, but if you take the right steps, your confidence may grow. There are proven methods, such as holding a diversified portfolio and investing over the long term, that can reduce your risk and increase your returns. Below you will get a better understanding of the way investing works and how to invest more safely so that investing does not feel like gambling.
How Does Investing Work?
Simply put, investing means buying an asset that you expect to generate a profit from, often through returns, interest, or income.
Investment profits come from many types of assets, including stocks, bonds, mutual funds, real estate, and even businesses. The goal is to have your investments grow and generate income in the form of interest or returns. Through reinvesting returns over time, you can compound growth faster and achieve wealth goals sooner.
Investments like stocks, exchange-traded funds (ETF), and mutual funds may realize gains as they are bought and sold. They may also produce an income stream if they pay dividends. You could also invest in bonds and receive quarterly or annual payments. On the other hand, buying a home or real estate are long term investments that hopefully build up value over time.
Wherever you choose to put your money, the underlying goal of investing is to build wealth.
What Are The Most Common Types of Investments?
Here are three of the most common investments you may find.
Stocks (aka Equities)
When you buy stock, you are purchasing an ownership interest in a company. Buying stock lets you participate in both the gains and losses of a company. If the stock pays dividends, you receive periodic payments that give you extra income.
Stocks can be risky investments. A company with strong performance can deliver a decent return on your investment. You can also lose your investment if the company doesn’t perform well or goes out of business.
Exchange-Traded Funds (ETFs)
An ETF is a bundle of securities providing a mix of investment options. ETFs may include a combination of stocks or bonds across one or more industries, geographies, or investment styles. By purchasing a cross-section of securities, you lower your risk and avoid putting all your money in only one asset.
Stocks and ETFs can be purchased through brokerage accounts like a MoneyLion managed investment account. After signing up, you answer a few questions that determine your investment risk profile, ranging from conservative to aggressive. For example, a moderate portfolio generally averages 3-5% returns. MoneyLion will then choose a selection of stock and bond ETFs personalized to you.
Bonds (aka fixed income)
Investing in a bond is similar to loaning money to a company. Bonds are considered safer investments because you receive a fixed rate of return for your money. Plus, your initial investment is meant to be repaid at the end. While you won’t typically see large returns when you invest in a bond, you can generate a modest income stream. Stocks and bonds together make a much sounder portfolio.
With a retirement account, you can save money to pay for retirement expenses. Your employer may sponsor a retirement account known as a 401K. Sometimes they even match your contributions to the account (up to a certain amount). Or, you may choose to go through a private broker to set up an individual retirement account, commonly known as an IRA.
Investments for retirement accounts tend to aim for steady growth over the long run. You’ll find that 401K investment options are highly regulated and often limited to diversified funds.
Difference Between Gambling and Investing
On the surface, gambling and investing may seem alike in some ways. They both involve taking risk with your money and not being able to predict outcomes. Yet there are some key areas that they differ on, especially when it comes to the following.
Volatility refers to swings in price or investment value. While a highly volatile investment can possibly produce large returns, it can also result in bigger losses.
When investing, you can choose to invest in funds with a more conservative profile that are traditionally less volatile. If you plan to hold your investments for an extended time, this investment strategy should produce growth in the long run. You are also less likely to experience the wide price swings that would cause your portfolio to drop in value.
On the other hand, you can’t minimize the risk of volatility when you gamble because you either win or lose. The outcome is highly unpredictable. Whether you put down $100,000 or $10, you might not end up getting it back.
Diversification is a strategy used to manage risk. You diversify your holdings by making investments in a variety of securities across different industries. This way, if one investment doesn’t perform as well as you had hoped it would, its drop in value only represents a portion of your portfolio. Diversification is a healthy investment strategy to follow.
Gambling is the opposite of diversification; it’s the equivalent of putting all your eggs in one basket. You typically place bets on games like slots or blackjack, and it’s all over in minutes. If your bet doesn’t pan out, you could easily lose whatever you put in. The outcome is purely left up to chance.
Another difference, is that historically, stock and bond markets have recovered from all drops in value. So if you stay invested over the long term, you will gain when the market inevitable starts to climb back up. With gambling, once you lose – that money stays lost.
Playing the Odds
Gambling is all about quick wins. The primary strategy is to beat the odds and make fast money. Yet the odds typically don’t work in your favor when you gamble against the casino – the house always comes out on top.
You’ll see better odds when investing your money, rather than gambling it away. Investing is focused on building wealth. You choose the funds to invest in based on your tolerance for risk and expected return. A well-planned investment strategy can make your money go farther. If you’re playing the odds, investing in a long-term diversified portfolio yields a much better return.
Investing for your Future
While both investing and gambling are related to beating odds, there is more to investing than just chance. Gambling is associated with short-term wins, whereas strategically investing your money opens up the opportunity to create long-term wealth.
You don’t need to be wealthy or a seasoned investor to invest in your future. You can start investing your money today, even if you are a beginner.
If you’ve never invested before, it’s easy to start with a MoneyLion investment account. In fact, 90% of MoneyLion customers are first-time investors. With no account minimums and zero asset-based management fees, it’s never been easier to start saving for your future.