Types of investment
Investing to grow money, and the risk that comes with it.
Investing means putting money into something, hoping it grows, while accepting it might not. It is different from saving: the returns can be higher, but the value can fall as well as rise, and nothing is guaranteed. It usually makes most sense over a long time, when there is room to ride out the ups and downs.
Investing versus saving
Saving keeps your money safe and pays a bit of interest. Investing puts your money into something in the hope it grows more, but with a catch: the value can go down as well as up, and there is no guarantee you get back what you put in.
That is the trade at the heart of investing: the chance of a bigger reward, in return for taking on more risk.
What people invest in
The common investments are stocks and shares, property and cryptocurrency. Shares are small slices of a company that you can buy and sell; if the company does well the shares may be worth more, and some pay dividends.
Property can be an investment when it is bought to rent out, known as buy-to-let. Cryptocurrency is a digital currency with no central authority, and its price can swing sharply, which makes it one of the riskier options.
Risk, reward and time
Every investment sits somewhere on a scale of risk and reward. Higher potential returns usually come with a higher chance of losing money, so more reward means more risk, not a free lunch.
Investing is usually thought about over a longer period. A longer timescale gives the value more time to recover from short-term falls, but it does not remove the risk, and growth is never guaranteed.
- 'Investing is just a better savings account.' It is not. Savings are low risk and your money is safe; investments can fall in value, and you might get back less than you put in.
- 'A longer timescale removes the risk.' It gives more time to recover from dips, which helps, but it does not make an investment safe or guarantee a gain.
- 'High returns are just about picking well.' Higher potential returns come with higher risk. There is no return without accepting the chance of a loss.
Key terms
- Shares
- Small slices of a company that you can own, buy and sell.
- Risk and reward
- The chance of a higher return usually comes with a higher chance of losing money.
- Buy-to-let
- A property bought in order to rent it out.
- Cryptocurrency
- A digital currency with no central authority, whose price can swing sharply.
Not examined
Check your understanding
- What is the difference between saving and investing?
- Why is investing usually considered over a longer period?
- Give two examples of investments.
Show suggested answers
- Saving keeps your money safe for a small, steady return; investing puts it into something that might grow more but could also fall in value, with no guarantee.
- A longer timescale gives the value more time to recover from short-term falls, though it does not remove the risk.
- Any two of: stocks and shares, property (buy-to-let), cryptocurrency.