Imagine you decide to start a business selling homemade ice cream. First you have to make the ice cream and this requires money for the ingredients. Then you need to put the ice cream into something, a cornet or a tub and have little spoons to eat it. They also cost money. Posters, flyers and price lists for your new ice-cream business also cost money. Unfortunately, you don’t have any. So what do you do? You ask someone to ‘invest’ some money in your business. Your dad might agree to lend you 100 pounds (or dollars) which you would not have to repay, as long as for every ice cream you sold, you shared part of your profit with him.
Your ice-cream business really starts to do well. Word gets around that your Mint Choc-chip Icicle Bonanza is amazing. People start calling you and ordering lots of tubs of your Mango and Banana Freezie. You have agreed to pay your dad ten pence for every pound you make so the more money you earn, the more money your father gets. This is called investment. You could soon be rich … and so might your dad, just for giving you 100 pounds.
When a company feels it is ready to grow but doesn’t have the money, it may decide to do an ‘Initial Public Offering’ (IPO) or ‘go public’. The company might need money for new materials, money to hire more people or develop products or even a new office so it decides to sell ‘shares’ to the public. Every person who buys a share now owns a tiny part of the company. Their new shares are traded on the Stock Exchange.
The way to make money is to buy a share ‘low’ – when it’s cheap, wait until it increases in value and then sell it ‘high’. This difference will be your profit.
Another way of using your money in an altogether friendlier way is to donate to charity.
A charity is an organisation which raises money to support a cause, usually to help children with problems, assistance to the elderly, health, medical research and the environment. They also raise money to give support if there has been a natural disaster like a terrible flood, earthquake or tsunami. There are also charities which help countries deal with longer-term problems such as access to clean water and sustainable food production.