Module 1Lesson 1Preview
Investing Basics
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CASE University
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Investing Basics
Module 2
Stocks & the Market
Module 3
Business Fundamentals
Module 4
Understanding the Income Statement
Module 5
Balance Sheet & Cash Flow
Module 6
Analyzing a Company
Learn what investing is, why people invest, how investing differs from saving, and how ownership can help build wealth over time.
By the end of this lesson, you should be able to:
Investing means putting money into an asset with the expectation that the asset may become more valuable or generate income over time. When you invest, you are choosing to give up the ability to spend some of your money today because you believe that money can help create more value in the future.
A simple $100 decision
Imagine you have $100. You could spend the $100 today. You could place it in a savings account. Or you could invest it in an asset that you believe may grow over time. Investing is the third choice. It does not guarantee that the $100 will become more valuable. Investments can rise or fall in value, and that uncertainty is one of the fundamental differences between investing and simply holding cash.
Saving and investing are both important, but they serve different purposes.
| Saving | Investing |
|---|---|
| Generally prioritizes safety and accessibility. | Generally accepts more risk in pursuit of future growth. |
| Often used for emergency funds, bills, and near-term purchases. | Often used for retirement, long-term wealth building, and goals several years away. |
| Usually intended for money you may need soon. | Usually intended for money you can leave working longer. |
Money does not grow simply because it was labeled an investment. There must usually be something creating economic value underneath it.
If investors believe a business will become more valuable, they may be willing to pay more for ownership in it.
When you purchase a share of stock, you are purchasing a small ownership interest in a company. You are not simply buying a symbol moving up and down on a screen.
CASE Coffee Company
Suppose a fictional company called CASE Coffee Company has 1,000 total shares. If you own 10 shares, you own 10 ÷ 1,000 = 1% of the company. A real public company may have millions or billions of shares outstanding, so an individual investor's percentage may be extremely small. The principle is still the same: a share represents ownership.
Calculating a gain
If you purchase an investment for $100 and later sell it for $120, you have a $20 gain before considering taxes, fees, or other costs. Percentage return = ($120 - $100) ÷ $100 = 20%.
Some companies distribute part of their profits or available cash to shareholders. Those payments are called dividends. A shareholder may therefore receive income while continuing to own the stock. Dividends are not guaranteed and can be reduced or eliminated.
Some investments involve lending money. For example, when an investor purchases certain bonds, the investor is effectively lending money to a government, corporation, or other issuer under specified terms. The borrower may pay the investor interest.
Investing involves risk. An investment that can increase in value can often decrease in value as well.
Two choices
Choice A: You are guaranteed to receive your $100 back tomorrow. Choice B: Tomorrow your $100 investment could be worth $120 or $80. Choice B contains more uncertainty. Investors generally expect the possibility of a higher return when they agree to accept additional risk. That does not mean taking more risk automatically creates more profit.
| Investment | Basic idea |
|---|---|
| Stocks | Ownership interests in companies. |
| Bonds | Debt investments that generally represent money lent to an issuer. |
| Exchange-traded funds (ETFs) | Funds that can hold collections of stocks, bonds, or other assets and trade on an exchange. |
| Mutual funds | Pooled investment funds that hold groups of assets. |
| Real estate | Property that may create value through appreciation, income, or both. |
Investing and gambling can both involve uncertainty, but they are not automatically the same activity. An investor can study the business, revenue, earnings, cash, debt, competition, valuation, management, industry conditions, and risk before deciding whether an asset is worth owning. Research does not eliminate risk. It creates a framework for making informed decisions.
One of an investor's greatest advantages can be time. If investment gains remain invested, future growth can occur on both the original money and previous gains. That is compounding.
| Point in time | Value |
|---|---|
| Starting amount | $1,000.00 |
| After Year 1 | $1,080.00 |
| After Year 2 | $1,166.40 |
| After Year 3 | $1,259.71 |
| After Year 4 | $1,360.49 |
| After Year 5 | $1,469.33 |
Later CASE University courses can build toward technical analysis, trading, options, swing trades, and LEAPS. Those tools are stronger when they are built on an understanding of businesses, ownership, risk, and value.
| Term | Meaning |
|---|---|
| Investment | An asset purchased with the expectation that it may generate income or increase in value. |
| Investor | A person or organization that commits capital to an investment. |
| Stock | An ownership interest in a corporation. |
| Share | A unit of ownership in a company. |
| Return | The gain or loss generated by an investment. |
| Dividend | A distribution that a company may make to shareholders. |
| Risk | The possibility that an outcome will differ from what was expected, including losing money. |
| Compounding | Growth that occurs when previous gains can themselves generate additional gains. |
| Capital |
The $1,000 decision
Imagine you receive $1,000. You can spend it, keep it in cash, or keep some available and invest some for the future. Before deciding, ask: When might I need the money? Do I already have emergency savings? How much loss could I tolerate? How long could the money remain invested? What am I trying to accomplish? There is no universal answer that fits every person's situation. The goal is to begin thinking like an investor.
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| Money or other resources used to create future economic value. |