Investing puts the money you earn to work, potentially increasing your net worth over time. Whether you're saving for retirement, getting ready to put your children through college or hoping to purchase your first home, you can find an investment strategy that fits your financial goals and risk tolerance.

Even small amounts can lead to substantial results, especially when you invest on a regular basis. Adding just $1,000 a year to a tax-free account with an annual return of 8% will give you $122,346 after 30 years. But, while investing provides potentially substantial opportunities for growth, there are important risks to consider as well.

Investment Types

There are three basic asset classes, or investment types: stocks, bonds and cash. Cash investments include bank and credit union accounts, money market mutual funds, certificates of deposit and US Treasury bills. Stocks represent ownership in a company, and bonds are loans that typically pay regular interest until the principal is returned at maturity.

You can invest in just one or two of these asset classes on their own or in a portfolio that contains a combination of some or all of them. If you buy shares in a mutual fund, the fund's managers pool your assets with other investors' to make large investments in a range of securities.

Investing can be more than just purchasing securities outright. Options, for example, belong to a category of financial products known as derivatives. With options, you aren't purchasing the security but rather a contract whose value is based on the performance of the underlying investment or other financial instrument.

Strategies like compounding, hedging and leverage can help maximize your return, limit risk and increase your financial power, respectively. Investment techniques can be short-term or long-term and range from the conservative to the aggressive. The approach you take and what you invest in depend upon your financial objectives, time horizon and risk tolerance.

When you invest, you're interested in whether you're making progress toward your financial goals. Return on investment can help you gauge how much progress you're making.

Your total return is the profit or loss on the money you invest. It's calculated by adding any income an investment pays to the change in the investment's value, or price.

You can evaluate the performance of your investment against that of other investments by using percentage return. Looking at a percentage rather than a dollar amount allows you to compare results even when the amounts you invest are very different. You find percentage return by dividing total return by the investment's initial cost.

Annualized return takes into account the amount of time you've held an investment. Another way to make a meaningful comparison among investments, annualized return is calculated by dividing percentage return by the number of years in question.

For example, if you buy a stock that does not pay dividends at $20 a share and sell it for $27 a share, your return is $7. If you bought the stock on April 3rd and sold it the following April 4th, that would be a 35% annual percentage return ($7 � $20 = 0.35, or 35%). But, if you held the stock for four years before selling it at $27 a share, your annualized return would be 8.75% (35% � 4 = 8.75%).

Remember though, that inflation, transaction fees and taxes are likely to erode the total return on investments. Real return represents the purchasing power of what you receive from your investments, after accounting for inflation.