What is investment and how to become an investor: an overview

Investments are different - in securities of public companies, young startups, in several types of assets and more. Understanding what it is, how to start and what famous investors can serve as inspiration.

What is investment?
Investment is the inserting of money to generate income or to preserve capital. Investments are long-term investments of capital in sectors of the economy within the country and abroad.
People who invest are called investors. Anyone can become a private investor - a middle manager, a financier, a doctor, a teacher, a student or a pensioner, this does not require any special education. For these people, this is a way to earn extra income. Traders are the opposite of investors; they constantly conduct short-term transactions, this type of activity is their main source of income.While investments are aimed at making an investor a profit, they are not a guaranteed way to get it. Different ways of investing provide different ways of earning income, but in all cases there is a risk that instead of profit, the investor will receive a loss.The opposite of investment is divestment. In economics, they call it the reduction of an asset. Divestment can be called the sale of part of an existing business - companies do this if they want to focus on their core business. In addition, divestments can be made for moral and ethical reasons. For example, it can be the sale of shares in a company that harms the environment. In addition, sometimes divestment is the result of antitrust policy.

Types of investments
The concept of investment is not limited to private investment in securities or financial derivatives. In a broad sense, the term "investment" can be extended to any investment by an individual or company, whether it be money, tangible assets or intangible assets.

By investment objects
Real investment. These include, for example, the purchase of a ready-made business; acquisition of intangible assets such as patents, copyrights, trademarks, etc.; construction, reconstruction, overhaul.
financial investment. These include the purchase of securities or derivative financial instruments.
Speculative investment. In this case, the main feature of the investment is the rate on income due to changes in the price of the asset. The principle of "buy low, sell high" applies. The subject of speculative investments can be stocks, and in addition to them - currency, precious metals, bonds.
Venture investments. So called investments in young companies for the long term. Venture investments are associated with a high risk of completely losing investments, but they can also bring excessive profits to investors. An example of a successful venture capital investment is SoftBank's investment in the fledgling Alibaba in 2000. After Alibaba's IPO in 2014, SoftBank's share increased from $20 million to $74 billion. An example of a failed venture capital investment is the bankruptcy of the medical project Theranos, which raised at least $500 million from venture investors before its collapse.
Portfolio investment. This is an investment not in one type of asset (for example, a share of a particular company), but in several at once, which are formed in the form of a portfolio of several securities.
Intellectual investments. This is how investments in an intellectual product are called. These may be the training of specialists, scientific developments, intellectual property, the creative potential of a group of people.

By investment period
For convenience, private investments are divided into groups depending on the timing. There are three in total:

short-term (period up to a year);
medium-term (from one year to three years);
long-term (three years or more).

By degree of risk
There are two main styles of investing today:

passive investment. They are characterized by investments for the long term. This style assumes that a person has invested money, for example, in company shares and holds them for several years without selling. As a rule, passive investments are made in large commodity, technology, financial companies - they have a lower risk of a sharp drop in quotations, such companies often pay dividends;
aggressive investment. This implies that the investor invests in more risky instruments. For example, in shares not of industry locomotives, but in shares of smaller companies - with market fluctuations, such securities grow or fall more strongly (that is, they have high volatility), but due to the same quality, you can earn more. This type of investment requires a deep understanding of the market and is ready to lose invested funds, if an investment goes wrong.

Where to invest money
There are many ways to invest in the stock market. Some do not require deep knowledge of how financial markets work, while others are handled only by professionals.

The most common items for investment on the stock exchange include:

Investments in shares;
Investments in bonds (government or corporate);
Investments in precious metals (gold, silver, platinum);
Investments in exchange-traded funds (ETFs) or mutual funds;
Purchase of currency;
Investments in derivative financial instruments (futures, options, swaps, etc.)

Profitability and investment risks
Investments have two key qualities that are directly related. This is return and risk. The higher the risk associated with an investment, the higher the potential return can be. And vice versa - relatively reliable investments won't give you such a high earning.

For example, a bank deposit, which can also be considered an investment, or the purchase of government bonds are low-risk investments. Bank deposits are insured, and in the case of government bonds, the state acts as a guarantor of the return of money. However, the return on such investments is also lower than the potential return on stocks, which can be affected by a variety of reasons - from market to corporate.
Another example can be given to illustrate the relationship between risk and return. Bonds with a ten-year maturity bring more income to the buyer than, for example, three-year bonds. The following principle applies here: the higher the maturity of the bond, the greater the risk the investor takes on (after all, a lot can happen even with government bonds in ten years) and, accordingly, the more he needs to be rewarded for this risk.

How to start investing
An individual cannot trade on the stock exchange on their own. This is done by brokers, and they also act as intermediaries between the exchange and the investor. You need to open a brokerage account, after which its owner gets the opportunity to buy / sell securities.

Brokers also provide services of a professional manager. Together with specialists, you choose an investment strategy, agree under what conditions which shares to buy/sell, and then situational decisions on your portfolio are made by the manager.

Investment income tax
There are three most common ways to make a profit. Get the difference between buying and selling a security, get a coupon payment on bonds or dividends. All three types of income are taxed. The broker pays them to the state for the investor.

The legislation takes into account situations when an investor made a profit from one transaction, and a loss from another. For example, if you bought a security for $10,000 and sold it for $14,000, your profit would be $4,000. If you also bought for $10,000, but sold for $9,000, then your loss will be $1,000. As a result, you will need to pay tax on the amount of $3000.

Investment portfolio and its diversification
The totality of all investments of the investor is called the investment portfolio. It may consist of shares of a single company, but analysts and experienced investors recommend not spending all your capital on one security. To reduce risks and increase the profitability of investments, the investment portfolio is diversified - that is, investments are divided between different securities.

Even developed economies and large companies inevitably face periods of recession and stagnation. To protect against such situations, the investment portfolio includes not only stocks, but also bonds, deposits, exchange-traded funds. Professional investors add to the portfolio contracts for the supply of goods - futures.
The most risky, but at the same time the most profitable part of the portfolio include shares. Exchange-traded funds are the golden mean, associated with relatively low risk and high return. The protective part of the portfolio - bonds and deposits that stabilize it in case of strong volatility, this is the most reliable part of the portfolio.

In addition to asset diversification, it is also important to distribute the portfolio across sectors or industries of the economy. The importance of such a principle can be clearly seen from a close examination of any economic crisis. During such periods, when some stocks fall, others rise, this creates a balance and allows you to minimize losses.

Notable investors
Warren Buffett is an American businessman, one of the most successful investors in history and one of the richest people in the world. He is called the "Seer", "The Wizard of Omaha", "The Oracle of Omaha". Invests through his own investment company Berkshire Hathaway. Bloomberg estimates his fortune at $103 billion.

Peter Thiel is an American investor of German origin. Co-founder of the PayPal payment system, the first external investor in Facebook, co-founder and manager of the Founders Fund.

Yuri Milner is a businessman and venture investor, co-founder of the DST fund. Through the DST fund, Milner has invested in companies such as Facebook, Spotify, Airbnb, Groupon, Xiaomi, Twitter, Zynga, Alibaba, WhatsApp. In 2022, Forbes estimated the fortune of Yuri Milner at $7.3 billion.

George Soros is an American trader and investor. Soros has a reputation as a daring financial speculator. He rose to prominence after 1992, when he took an active part in the collapse of the British pound.

Carl Icahn is known as one of the most successful activist investors. Aikan finds inefficient companies, buys up their shares, pushes through changes in the management, and then sells securities that have risen in price. He bought large, often controlling stakes in companies from different sectors of the economy. Among the investments of the businessman was Apple - Aikan bought 4.7 million securities of the corporation, after which he achieved a buyback in the amount of $ 150 billion.

The Winklevoss brothers are twins Cameron and Tyler Winklevoss, American investors best known for their legal battle with Mark Zuckerberg (the Winklevoss claimed that Zuckerberg used their idea to create Facebook) and as one of the first Bitcoin investors. The Winklovosses became the first cryptocurrency billionaires.

Koos Becker is a South African businessman and head of Naspers. Under Becker, Naspers invested $34 million in 2001 in an obscure Chinese startup called Tencent. As a result of the transaction, Naspers received a 46.5% stake in the unprofitable project at that time. Over time, Tencent has grown into a huge investment corporation. Tencent's main asset today is China's largest messenger, WeChat.

Masayoshi Son is a Japanese businessman and founder of SoftBank. Created SoftBank, Vision Fund Investments, which invests in new technologies, artificial intelligence and robotics, has become one of the largest investment funds in Silicon Valley in recent years.