Understanding the Difference Between Investment and Investing


Understanding the Difference Between Investment and Investing

Investing refers to the buying of stock or securities with the intention of making money in the future, either by selling the same as shares in a company or by any other means. To make money through investment is to assign a value to some assets in anticipation of a profit or return in the near future. Simply put, to make money through investment means having an asset or something with the intention of making money in the future and/or the gain of some profit from the investment. Therefore, when investing refers to buying some asset today for the purpose of selling it or cashing in on the gains in the future for some future benefit. Investing also refers to buying and holding assets, with the purpose or effect of holding on to them until the time of the sell-out, at a pre-decided price. A classic example of investing in stocks and other securities is the purchasing of U.S. Treasuries (which is issued by the United States government) for the purpose of reselling them later for a profit in the future.

The term ‘investment’ is used in a wide variety of ways. It can refer to any kind of purchase or lending of funds, including bonds, foreign currency, real estate, insurance, franchises, private equity, financial derivatives and the like. A typical definition of investment is: “The assigning of a value to an asset (including the provision of credit or payment of money) that will ultimately result in the creation of a financial return”. This definition is simple enough to understand and follow; however, there are many subtleties which complicate the understanding of investments. Understanding these subtleties is important if you are going to make any sort of investment decision, especially since the returns on some investments may not be guaranteed.

An example of such an investment decision might be the purchase of U.S. Treasuries for the sole purpose of obtaining an interest in them after a specified period of time – say 30 years – at a fixed interest rate. Such a purchase would constitute an investment. However, it is necessary to determine whether the specific bond will appreciate or depreciate, given its current price and market sector (i.e. the current stock market). In this case, the specific investment is not merely an investment in Treasuries but also an attempt to create rental income over time.

A second common example is the purchase of fixed interest investments, such as U.S. Treasury Bonds, municipal bonds and corporate bonds, as part of long-term financing programs. These financing programs are designed to provide temporary, indefinite or short-term funding to U.S. corporations in exchange for payments made on a monthly or annual basis. A similar situation arises when investors attempt to obtain fixed interest income by purchasing annuity products such as indexed annuities or life annuities with variable rates of interest. The difference between these two examples is that the investors will receive fixed interest income regardless of how the economy performs. Furthermore, there is no ceiling on the amount of income the investor can receive.

Still another example of an investment is the purchase of mutual funds. Mutual funds are investments in securities that track the performance of various asset classes. For example, the portfolio of funds may be comprised of stocks, bonds, cash instruments, alternative investments and other securities whose price appreciation and/or loss are dependent on the performance of the underlying securities.

Some people may debate whether bonds should be included among the list of categories of good long-term investments. While most experts would agree that bonds should be part of the overall portfolio because they offer attractive interest income and they have significant liquidity, they argue that there are distinct advantages for using bonds as a portion of an overall investment strategy. Among those advantages is the fact that bonds offer safety and most bond indexes are based upon the performance of underlying index products, whereas other investments such as stocks and the majority of real estate investments do not have significant diversification benefits.