You’ve heard a lot about it. You may have flipped past MSNBC and saw the green and red arrows and the acronyms and wondered “What does it mean?” and “Why do people care so much?” Before we go into what those arrows mean and why the talking heads on those networks continue to blab on let’s strip away all the opinion and discuss the facts concerning stocks. (You’ll notice I am not going to discuss much of the mechanics of how stocks are traded that is the subject of the next lesson).
Let’s begin with a pretty basic idea and define what an investment is. You have probably heard “John bought Apple stock years ago that turned out to be a great investment” or “by earning a college degree I am investing in myself.”
An investment in its simplest terms is a purchasing of an asset in with relative certainty that the asset you purchase will generate income and/or increase in value. Another way of looking at an investment is that you are sacrificing immediate consumption in hopes of a greater payoff at some point in the future. Let’s go through some examples to paint a clearer picture.
- An investment is an asset that will either increase in value and/or generate income.
- Returns are how we measure how “good” or “bad” an investment is.