Investment

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Investment has different meanings in finance and economics.

In economics, investment is related to saving and deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.

In finance, investment is putting money into something with the expectation of gain, usually over a longer term. This may or may not be backed by research and analysis. Most or all forms of investment involve some form of risk, such as investment in equities, property, and even fixed interest securities which are subject, inter alia, to inflation risk.

In contrast putting money into something with a hope of short-term gain, with or without thorough analysis, is gambling or speculation. This category would include most forms of derivatives, which incorporate a risk element without being long-term homes for money, and betting on horses. It would also include purchase of e.g. a company share in the hope of a short-term gain without any intention of holding it for the long term. Under the efficient market hypothesis, all investments with equal risk should have the same expected rate of return: that is to say there is a trade-off between risk and expected return. But that does not prevent one from investing in risky assets over the long term in the hope of benefiting from this trade-off. The common usage of investment to describespeculation has had a effect in real life aswell: it reduced investor capacity to discern investment from speculation, reduced investor awareness of risk associated with speculation, increased capital available to speculation, and decreased capital available to investment.

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[edit]In economics or macroeconomics

In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production (i.e. capital). Examples include railroad or factory construction. Investment in human capital includes costs of additional schooling or on-the-job training. Inventory investment is the accumulation of goods inventories; it can be positive or negative, and it can be intended or unintended. In measures of national income and output, "gross investment" (represented by the variable I) is also a component of gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports, given by the difference between the exports and imports, X −M. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP − C − G − NX).

Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I. "Net investment" deducts depreciation from gross investment. Net fixed investment is the value of the net increase in the capital stock per year.

Fixed investment, as expenditure over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock— that is, accumulated net investment to a point in time (such as December 31).

Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Yr). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.[1]

[edit]In finance

In finance, investment is the application of funds to hold assets over a longer term in the hope of achieving gains and/or receiving income from those assets. It generally does not include deposits with a bank or similar institution. Investment usually involves diversification of assets in order to avoid unnecessary and unproductive risk.

In contrast, dollar (or pound etc) cost averaging and market timing are phrases often used in marketing of collective investments and can be said to be associated with speculation.

Investments are often made indirectly through intermediaries, such as pension funds, banksbrokers, and insurance companies. These institutions may pool money received from a large number of individuals into funds such as investment trustsunit trustsSICAVs etc to make large scale investments. Each individual investor then has an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied.

[edit]History

The Code of Hammurabi (around 1700 BC) provided a legal framework for investment, establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard to pledged land. Punishments for breaking financial obligations were not as severe as those for crimes involving injury or death.

In the early 1900s purchasers of stocks, bonds, and other securities were described in media, academia, and commerce as speculators. By the 1950s, the term investment had come to denote the more conversative end of the securities spectrum, while speculation was applied by financial brokers and their advertising agencies to higher risk securities much in vogue at that time. Since the last half of the 20th century, the terms speculation and speculator have specifically referred to higher risk ventures.

[edit]Types of investment

Types of investments include:

[edit]See also

[edit]Notes

  1. ^ Kevin A. Hassett (2008, 2nd ed.). "Investment," The Concise Encyclopedia of Economics. Library of Economics and Liberty.

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