An investment opportunity is any situation where you have the option of purchasing something that has a chance to gain value in the future. Investment opportunities are different from investment prospects, which refer to possible future investment opportunities. The key to making money through investing is knowing which opportunities to take advantage of and how to manage them.
Investors who seek out investment opportunities will find no lack of options. Stock markets stay in business by marketing investment opportunities to buyers who put their money into companies with hopes that they'll grow. Government bonds are another source of investment opportunities, allowing buyers to loan money to the government in exchange for interest. Real estate is another type of investment opportunity, with the prices of homes and land constantly rising and falling. Other investment opportunities include classic automobiles, collectibles, foreign currencies and commodities, such as agricultural products and precious metals.
One of the ways to differentiate between investment opportunities is by examining the amount of risk each one represents. Economists refer to a given investment's likelihood to change its value as volatility. For example, stocks are highly volatile since new products and financial reports can make investors more or less willing to own shares in a company, causing the price to drop or rise. Government bonds, on the other hand, have a very low volatility and represent safe investment opportunities that have limited room for growth. Predicting volatility and accounting for risk are essential to making money consistently by investing.
Investment opportunities often include elements of psychology. There may be a large disconnect between how appealing a given investment opportunity appears and how likely it actually is to make money for those who take advantage of it. For example, the rise in housing prices through the 1990s and 2000s made real estate seem like a strong investment opportunity for many buyers and lenders, leading to unrealistic prices and unaffordable loans that caused the economic crisis of 2008 and 2009.
Psychology also governs the growth of many types of investments. Stock prices are set purely by how much buyers are willing to pay for shares and what sellers are willing to accept. Fear that prices will fall may lead owners to sell their shares at low prices, which in turn can create a drop in prices and an excellent investment opportunity for new investors who buy at the new, low price.
The value of an investment opportunity depends on the individual investor's needs. Those who can afford to lose more money can take bigger risks. Other investors need to distribute their level of risk across multiple investment opportunities with different levels of volatility. Young investors can also take bigger risks since they have more time to wait for their investments to gain back value. Investment opportunities that look too good to be true may be scams that prey upon the emotions of investors desperate for a profit. Rational thinking and careful research are the keys to managing investment opportunities responsibly.