Explained: What is Investing and How Does it Grow Your Money?

While earning interest on your savings is one way to grow your money, investing it is another way to ensure you get decent returns on your money. Once you have decided on your financial goals, investments can actually be a great way to grow your money both, in the short term and in the long term.

So, what exactly is investing and how does it grow your money? Let’s find out.

What is Investing?

Investopedia defines investing as ‘the act of allocating resources, usually money, with the expectation of generating an income or profit.’

Based on your financial needs and goals, you can consider investing in bonds, mutual funds, stocks etc. The returns on each investment depends on the kind of instrument/s you choose to invest in.

How do Investments Grow Your Money?

Most investments grow your money through interest payments, appreciation, or dividends.

An example of how you could earn interest is by putting your money in bonds. As an investor in bonds, you are actually lending money to the government or an organization. These institutions make interest payments on your investment when they repay the amount back to you.

Appreciation usually happens when the value of an asset that you have invested in has increased over a period of time. For example, you might have bought the stocks of a company a few years ago and now, since the company is doing well, the value of your stocks have gone up or appreciated.

Dividend payments are also made to investors who own the stocks or equities of a company. Public listed companies can raise money from the public to run their businesses by allowing people to buy their stocks. So if the company makes profit, it issues dividend payments to its investors as a way to share its gains. This is in addition to the appreciation of stocks.

What are the Risks Involved?

While investments can grow your money, there are not without risks.

In fact, returns and risks are the two sides of the same coin when it comes to investments. And usually returns and risks are directly proportional to each other in the world of investments - so lower the risk, lower the returns and vice versa.

Risks also depend on the type of instruments you invest in. For example, financial instruments such as liquid mutual funds, bonds or fixed-income instruments are considered to be in the low to mid risk range, while commodities and derivatives are considered to be high-risk investments.

Thus, it is important to do thorough research or consult a professional before you decide on which type of investments you want to put your money into.

Why do Investments Matter?

Investments may seem riskier than simple savings and often most people tend to shy away from them. But if you are familiar with the concept of compound interest, then you will understand why investments matter and why they can grow your money.

The principle of compounding is simple: it helps you earn interest on your interest. Mathematically, it means that in the second year of your investment, you earn interest on the principal sum plus the previously accumulated interest. And this cycle, when continued for long periods of time, can actually grow your money exponentially.

So, if you haven’t yet thought about investing your money, then it might not be such a bad idea after you have taken care of your basic needs, emergencies and savings.