One of many, many factors that bring about the failure of people in the world of investing in stocks, regrettably, is that because they enter it without knowing and constantly learning about it. It is not as if they are born into the financial world, right? To enter into this world is a choice. Therefore, it is very crucial that we understand it before diving into the deep waters of money. What does the term investment mean? Does it always automatically earn revenues? How does it become an advantage and how does it become a loss?
One very important definition of the term investment is the fact that not all assets are considered an investment. These two factors must be present: The asset should have a corresponding value in the market and it must generate revenue accruing to the owner.
Let us elaborate on the first characteristic. An asset, to be considered an investment, should have a real value in the market. A market is defined as an institution, not necessarily a place, wherein both buyers and sellers engage in trade and haggle and interact. It must not be something that does not have a commercial or monetary value, wherein the owner would have huge dilemma on how to dispose of it that can earn income.
The next characteristic of an investment is that, it must have a capacity to generate revenue. Otherwise, it is just a piece of ornament, and not an investment. In holding an investment over periods of time, revenue will be generated. In selling and disposing of the investment over periods of time, it will also have a capacity to generate money from disposal.
One cannot be without the other. Value should always coincide with its capacity or function to generate revenue. No matter how expensive the matter or item, if it cannot generate assets, then it is not classified as an investment. In financial terms, it is useless.
Here is the thing, though. Investments are not considered such if it cannot generate revenue. But that is not the only qualification it has. It is also considered a useful investment if it provides an opportunity for the asset-holder to save money or to cut expenses because of it. For example, in holding a certificate of deposit in a certain bank without earning income might traditionally and conventionally not be considered an investment but if the account holder can be exempted from incurring annual maintenance fees because of this then that asset is considered investment.
It is very sad how so many people, especially those who cannot understand the basics of financing and stock investment, treat all assets as investments. That is wrong. Consider this. A car is an asset. But is it necessarily an investment? No. A personal car per se (and no, I am not referring to the vehicle purchased with the intention of setting it up as a carpooling business) does not at all generate income. What do you do with your personal car? Spend cash for gas. Spend money for maintenance. Spend money for change in oil. Set up an emergency fund for unanticipated repairs. How do you generate income? There’s no way, actually. See, the cash outflow is even more than the cash inflow.
In conclusion, people who treat cars and other luxuries are not knowledgeable of this reality. They are considered as financial illiterates. What they consider as assets that even consume revenues are investments just so they hear on the radio or on the television. This sets what we call financial literates from those who are considered as financial illiterates apart. As a result, the former can take control of their own future while the latter depend of others to sustain their lifestyles.
In conclusion, from the meaning above, the primary things you should think regarding investing in stocks or investing in mutual funds are these: First, how much is the monetary value of the asset that I am about to acquire? Then you ask, is there a market for this? How liquid it this asset? Liquidity refers to how easy and convenient can one dispose of his or her asset. Another is how much income can it generate? Thing is, if the inflows of cash is only secondary to the expenses you have to incur to maintain the item, then it is not investing. That is maintaining the costs of having a liability. Otherwise, if generating revenue or cutting costs is a natural consequence in obtaining that item, then by all means, go for it.