- Understand the best way to grow your money and take advantage of compound interest.
- Understand how to avoid risk.
Investing generally involves compound interest, which is another topic under Financial Literacy. It's helpful to understand that first before learning about investing.
In its most basic definition, investing is when someone spends money on something—a stock, a piece of real estate, a business, a baseball card—and expects to make more money than they invest: profit. When most people think of investing, they usually think of something like the stock market, which trades stocks (a share/piece of a company) in an open market.
Investing is important because it's how people can create exponential value—in most cases, money—in life. Working for money, say, at a job, creates money linearly, meaning you have a fixed rate of income that doesn't change much, and you usually can't have multiple streams of income. But investing allows people to earn money through multiple streams of income—your money makes money, for you. This is what creates true wealth.
As you know, the stock market goes up and down. However, over time, it will go up. For example, 100 years ago the Dow Jones (a measure of the value of the stock market) was around $1,000. However, today, it is almost $27,000! That means, just by putting your money in a diverse portfolio in the stock market, your money is almost guaranteed to grow!
Learning Resources 🧠
Investopedia article on investing (also contains a helpful video)
Investing is the act of allocating funds to an asset or committing capital to an endeavor (a business, project, real estate, etc.), with the expectation of generating an income or profit. In colloquial terms, investing can also mean putting in time or effort - not just money - into something with a long-term benefit, such as an education.
An animated video on how the stock market works