What Exactly is an Investment?

Quick Answer

An investment is putting money into assets like stocks, bonds, real estate, or businesses with the goal of earning income or capital gains. Historically, the S&P 500 returned about 10% annually since 1926. Over 50% of U.S. households now hold stocks, according to the Federal Reserve’s 2013 Survey of Consumer Finances.

Updated July 2026

In the spirit of knowing what it is before you actually do it, what is investment? Sounds simple, but maybe not. Let’s take a clear and close look at it.

I’ve always thought one of the best tricks of professionals is how to get others to earn income for them. The partnership arrangements of law firms, CPA’s and others gives them relatively cheap labor from new and lower paid associates who later (sometimes, much later) become partners and share in the billings of newer (and lower paid) non-partner associates.

Lawyers (even higher paid partners) can only earn so much money by billing themselves (even if they work a lot of hours). So this is an ingenious way of adding to their income.

Some of the same principles are involved in investing. What is investment? It is the act of committing money or capital to an activity with the expectation of gaining more income or profit. Basically, it is putting your money (and getting others’) to work for you.

If you’re a professional, that’s fine. But there are many other ways to go about finding out what is an investment.

You can put the money into stocks. Mutual funds. Bonds. Real estate. Or even start your own business, all by yourself or with partners who may be “silent” or non-participating investors.

These are all “investment vehicles.”

They all have risks. And rewards, of course.
The goal is always the same, however. To make money.

Investing in modern times has changed for a lot of reasons. It’s gotten more complicated. It’s also gotten more widespread because workers no longer count on spending 30 years at a secure job where the corporation will take care of them when they retire. It’s not just a useful tool for retirement but for many, an essential way to maintain their lifestyle after retirement.

Investing is a relatively simple idea but not one that everyone always understands.
That’s why we have to explain what investing is and is not.

It is not gambling. That is risking money by betting on particular outcomes. The bettor hopes to win money. But generally the odds are inclined to be against him. But a good example of how people confuse the issue is someone who gets a “hot tip” not on a race horse but on a stock. He or she invests in it based on that “insider” advice. That’s the same as placing a bet at a horse track.

A real investor who is successful avoids such random threads of information. He or she analyzes where to “bet” or risk money.

They are betting they are right, of course. But it is a bet only because there are odds of winning or losing. Not all bets win. Nor do all investments make a profit. There are no guarantees on bets or investments. And real investors as opposed to gamblers may or may not have lady luck on their side, but that’s one consideration they don’t have to worry about.

Key Takeaways

Investing means putting money into assets such as stocks, bonds, or real estate to grow wealth over time SEC.gov.
The S&P 500 has delivered an average annual return of about 10% since 1926, according to data from the S&P Dow Jones Indices.
Over 53% of American households owned stocks or mutual funds in 2013, up from 38% in 2001, per the Federal Reserve’s Survey of Consumer Finances Federal Reserve.
High-interest debt like credit cards can undermine investing, with average APRs around 15.8% in 2013, according to the Federal Reserve FRED.
Chase, Fidelity, and SoFi are among the top platforms offering investment accounts with low fees Chase.
FDIC-insured accounts like savings accounts offer safety but typically yield less than 1% annually, making them poor long-term investment tools FDIC.

At its core, an investment is any asset or instrument you purchase with the goal of generating income or appreciation over time. It’s not just about buying stocks. It’s about using money to create more money, not through labor, but through capital deployment.

When you deposit $10,000 in a savings account at a bank like Chase or Wells Fargo, you’re not investing. You’re saving. The difference? Savings are meant to preserve capital, while investments accept risk in exchange for growth.

But not all investments are risky. Government bonds, issued by the U.S. Treasury, are considered among the safest. They pay interest and are backed by the full faith and credit of the U.S. government.

SoFi, Fidelity, and Vanguard are major players in the investment world right now. They offer access to mutual funds, index funds, and individual stocks, all with varying levels of risk and return.

Here’s the key distinction worth sitting with: you don’t have to be a millionaire to invest. The power of compound interest, where returns generate their own returns, is what drives long-term wealth, and it works on small sums just as it works on large ones. Someone who has $30,000 sitting in a bank savings account earning under 1% a year, versus an equal amount in a diversified stock portfolio averaging something closer to the market’s long-run 10% figure, will see that gap compound into tens of thousands of dollars of difference over two decades. That’s not a guarantee, since stock returns aren’t linear or certain, but it illustrates why parking long-term money in pure savings has an opportunity cost.

How Investing Differs From Gambling

Many people confuse investing with gambling. But there’s a critical difference: risk management.

When you buy a lottery ticket, you’re gambling. The odds are stacked against you. The average lottery winner gets $1 million, but the odds of winning are less than 1 in 292 million. That’s not investing.

Investing, by contrast, involves analysis. You study company earnings, interest rates, market trends, and sector performance. The CFPB (Consumer Financial Protection Bureau) warns against treating stocks like lottery tickets, a common mistake during market bubbles.

Consider the dot-com crash of 2000. Many investors bought tech stocks based on hype, not fundamentals. They lost money. But long-term investors who held diversified portfolios, like those recommended by Investopedia and The Motley Fool, recovered by 2007.

Real investors use tools like Credit Karma to track credit scores, which influence loan terms and investment eligibility. A FICO Score above 740 can qualify you for lower interest rates on margin loans, freeing up capital for investment. Someone with a 620 credit score, on the other hand, generally won’t get favorable margin terms and shouldn’t be borrowing to invest in the first place. If that’s your situation and you’re carrying, say, $8,000 in credit card balances at the kind of 15.8% average APR the Federal Reserve tracked in 2013, paying that down is arithmetically a better use of money than opening a brokerage account, since you’d need consistent double-digit market returns just to break even against the interest you’re already paying.

Common Investment Vehicles Explained

There’s no single “right” way to invest. But certain vehicles are better suited to different goals, risk tolerances, and time horizons.

Stocks: Ownership in Companies

When you buy a share of Apple (AAPL), you own a tiny piece of the company. You benefit if it grows. You can sell shares for a profit, or receive dividends, regular payments from company profits.

Since 1926, stocks in the S&P 500 have averaged 10% annual returns, adjusted for inflation. That’s far better than savings accounts, which paid less than 1% in 2013.

But stocks can fall hard. In 2008, the S&P 500 dropped 38%, a painful reminder of risk. That’s why diversification matters. Don’t put all your money in one stock.

Bonds: Loans to Borrowers

Bonds are loans. When you buy a U.S. Treasury bond, you’re lending money to the federal government. In return, you get interest payments every six months.

These are safer than stocks, but returns are lower. In 2013, the 10-year Treasury note yielded about 2.1% annually, according to the U.S. Department of the Treasury TreasuryDirect.

Corporate bonds offer higher returns but come with more risk. If a company like General Electric defaults, you could lose your principal. That’s why credit ratings from agencies like Moody’s and Standard & Poor’s matter.

Real Estate: Tangible Assets

Real estate is a physical investment. You can buy a rental property or invest in a REIT (Real Estate Investment Trust).

REITs like Simon Property Group or Equity Residential pay out at least 90% of their taxable income as dividends. In 2013, the average REIT dividend yield was 5.2%, according to the National Association of Real Estate Investment Trusts (NAREIT) NAREIT.

But real estate isn’t liquid. Selling a home takes months. And property taxes, maintenance, and vacancies can eat into returns.

Mutual Funds and ETFs: Diversified Portfolios

Mutual funds pool money from many investors to buy a diversified mix of stocks, bonds, or other assets.

For example, the Fidelity 500 Index Fund (FXAIX) tracks the S&P 500. It had an expense ratio of just 0.02% in 2013, meaning you paid only $2 per $10,000 invested annually. Compare that to a fund charging a 1% expense ratio: on the same $10,000, that’s $100 a year instead of $2. On a $50,000 balance held for 20 years, that fee gap alone (assuming no other differences in performance) works out to roughly $980 a year in extra cost at the higher-fee fund, money that comes straight out of your return before you ever touch compounding.

ETFs like SPDR S&P 500 ETF (SPY) trade like stocks but offer broad market exposure. They’re popular with investors using platforms like SoFi and Charles Schwab.

Investing in the Age of 401(k)s and Roth IRAs

Retirement savings vehicles changed the game. The 401(k) plan, introduced in 1978, allows workers to contribute pre-tax income. Many employers match contributions, effectively giving free money.

For example, if your employer matches 50% of your contributions up to 6% of your salary, you’re getting a 50% return on that portion. That’s better than most mutual funds.

But there’s a catch: early withdrawals before age 59½ incur a 10% penalty. The IRS allows exceptions for first-time homebuyers, education, or medical expenses.

Roth IRAs are different. You contribute after-tax dollars. But earnings grow tax-free. The IRS allows contributions up to $5,500 annually in 2013, with income limits.

How to Start Investing: A Step-by-Step Guide

Starting is simpler than most think. Here’s how.

Define your goal. Are you saving for retirement, a home, or education? Your timeline shapes your strategy.
Assess your risk tolerance. If you panic when markets drop, you may want more bonds and fewer stocks.
Open an account. Use a broker like Fidelity, Charles Schwab, or SoFi. You’ll need an SSN, address, and bank account.
Choose your investments. Start with low-cost index funds. The Vanguard Total Stock Market Index Fund (VTSMX) had a 0.07% expense ratio in 2013.
Set up automatic contributions. Even $50 a month builds wealth over 30 years thanks to compounding.

Remember: consistency beats timing. Trying to “time the market” rarely works. The average investor who stays invested for 10 years earns 7% annually, not much more than inflation, but those who stay for 20 years often beat 9%.

None of this applies neatly to everyone, though. If you’re carrying high-interest debt, lack an emergency fund, or expect to need the money within a year or two, investing isn’t the right move yet. Someone with irregular freelance income and only one month of expenses saved is better served building that cushion first; a market downturn hitting right when you need cash for rent is a real risk, not a hypothetical one.

Common Mistakes That Undermine Investment Success

Even smart investors make errors. Here are the biggest ones.

Chasing hot stocks. Buying shares based on a tip or media hype often leads to losses. In 2013, shares of Groupon (GRPN) dropped 60% after its IPO peak. SEC filings show many investors didn’t understand the business model.
Ignoring fees. A 1% annual fee on a $100,000 portfolio costs $1,000 per year. Over 30 years, that’s $73,000 in lost growth. Choose funds with expense ratios below 0.5%.
Overconcentration. Putting 50% of your portfolio in one stock is reckless. Diversification reduces risk. A portfolio with 10 stocks is far safer than one with just two.
Emotional decisions. Selling during a market crash locks in losses. The 2008 crash was followed by a 300% rally by 2013. Staying invested made the difference.

Investment Type	Average Annual Return (1926–2013)	Typical Risk Level	Minimum Entry
Stocks (S&P 500)	10.0%	High	$1 (via broker)
Bonds (10-Year Treasury)	2.1%	Low	$100 (via TreasuryDirect)
Real Estate (REITs)	5.2%	Medium	$100 (via brokerage)
Money Market Funds	0.8%	Very Low	$1,000 (typically)
High-Yield Savings Accounts	0.7%	Very Low	$100 (varies by bank)

Frequently Asked Questions

What is the difference between investing and saving?

Saving preserves money; investing grows it. Savings are low-risk and low-return. Investments accept risk for higher potential gains.

For example, a Chase savings account paid 0.7% in 2013, while the S&P 500 returned 10% over the long term.

Can I invest with $100?

Yes. Many brokers like Fidelity, SoFi, and Charles Schwab allow investments with as little as $1. You can buy fractional shares, especially in ETFs.

Platforms like Stash and Acorns are designed for small investors, though they charge higher fees.

How much should I invest in stocks?

It depends on your age and risk tolerance. A common rule is to subtract your age from 100, that’s the percentage of your portfolio in stocks. A 30-year-old might hold 70% in stocks.

But this rule is outdated. Modern advisors recommend more equity exposure, especially for younger investors. The CFPB advises using a risk tolerance quiz before deciding.

Is investing safe?

No investment is 100% safe. Even government bonds can lose value if interest rates rise.

But you can reduce risk by diversifying across asset classes. The FDIC insures bank deposits up to $250,000, but it does not protect stocks or bonds.

What’s the best investment for retirement?

It depends on your situation. A 401(k) with employer matching is often the best starting point. After that, consider a Roth IRA or taxable brokerage account.

Many financial planners recommend a mix: 60% stocks, 30% bonds, 10% real estate.

How do I avoid losing money in the stock market?

You can’t avoid all losses. But you can reduce risk by diversifying, investing regularly, and avoiding emotional decisions.

Studies show that investors who stayed in the market during the 2008 crash recovered their losses within five years.

Do I need a financial advisor?

Not if you’re disciplined and educated. Many people manage their own portfolios using tools like Morningstar, Yahoo Finance, and the SEC’s EDGAR database.

But if you have complex needs, like estate planning or tax optimization, a CFP (Certified Financial Planner) can help.

What’s the average return on stocks over 20 years?

Over the past 20 years ending in 2013, the S&P 500 returned about 8.2% annually. This includes dividends and adjusts for inflation.

Historical data from the S&P Dow Jones Indices shows this growth was not steady, but consistent.

Can I invest in real estate with little money?

Yes. REITs (Real Estate Investment Trusts) let you buy shares in large property portfolios with as little as $100.

Platforms like Fundrise offer access to private real estate projects with low minimums, though they are less liquid than public REITs.

How do I know when to buy or sell?

There’s no perfect timing. Instead, use dollar-cost averaging: invest a fixed amount monthly, regardless of market price.

Only sell when your goals change or a company’s fundamentals deteriorate. The SEC warns against “market timing,” it rarely works.

Sources

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What Exactly is an Investment?

Quick Answer

Key Takeaways