Investing
Investment or investing is a term with several closely-related
meanings in business management, finance and economics, related to saving or
deferring consumption. An asset is usually purchased, or equivalently a
deposit is made in a bank, in hopes of getting a future return or interest
from it. The word originates in the Latin "vestis", meaning garment, and
refers to the act of putting things (money or other claims to resources)
into others' pockets.
Types of investments
The term "investment" is used differently in economics and in finance.
Economists refer to a real investment (such as a machine or a house), while
financial economists refer to a financial asset, such as money that is put
into a bank or the market, which may then be used to buy a real asset.
Returns on investments will follow the risk-return spectrum.
Business Management
The investment decision (also known as capital budgeting) is one of the
fundamental decisions of business management: managers determine the assets
that the business enterprise obtains. These assets may be physical (such as
buildings or machinery), intangible (such as patents, software, goodwill),
or financial (see below). The manager must assess whether the net present
value of the investment to the enterprise is positive; the net present value
is calculated using the enterprise's marginal cost of capital.
A business might invest with the goal of making profit. These are called
marketable securities or passive investment. It might also invest with the
goal of controlling or influencing the operation of the second company, the
investee. These are called intercorporate, long-term and strategic
investments. Hence, a company can have none, some or total control over the
investee 's strategic, operating, investing and financing decisions. One can
control a company by owning over 50% ownership, or have the ability to elect
a majority of the Board of Directors.
Economics
In economics, investment is the production per unit time of goods which are
not consumed but are to be used for future production. Examples include
tangibles (such as building a railroad or factory) and intangibles (such as
a year of schooling or on-the-job training). In measures of national income
and output, gross investment 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. Thus investment is everything
that remains of production after consumption, government spending, and
exports are subtracted.
I is divided into non-residential investment (such as factories) and
residential investment (new houses). "Net" investment deducts depreciation
from gross investment. It is the value of the net increase in the capital
stock per year.
Investment, as production 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, an accumulation measurable at a point in time
(say December 31st).
Investment is often modeled as a function of income and interest rates,
given by the relation I = f(Y, r). 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 loaning them out for interest.
Finance
In finance, investment is buying securities or other monetary or paper
(financial) assets in the money markets or capital markets, or in fairly
liquid real assets, such as gold, real estate, or collectibles. Valuation is
the method for assessing whether a potential investment is worth its price.
Types of Investments
Types of financial investments include shares, other equity
investment, and bonds (including bonds denominated in foreign currencies).
These financial assets are then expected to provide income or positive
future cash flows, and may increase or decrease in value giving the investor
capital gains or losses.
Trades in contingent claims or derivative securities do not necessarily have
future positive expected cash flows, and so are not considered assets, or
strictly speaking, securities or investments. Nevertheless, since their cash
flows are closely related to (or derived from) those of specific securities,
they are often studied as or treated as investments.
Investments are often made indirectly through intermediaries, such as banks,
mutual funds, pension funds, insurance companies, collective investment
schemes, and investment clubs. Though their legal and procedural details
differ, an intermediary generally makes an investment using money from many
individuals, each of whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to purchase shares, put in a collective
investment scheme or used to buy any asset where there is an element of
capital risk is deemed an investment. Saving within personal finance refers
to money put aside, normally on a regular basis. This distinction is
important, as investment risk can cause a capital loss when an investment is
realized, unlike saving(s) where the more limited risk is cash devaluing due
to inflation.
In many instances the terms saving and investment are used interchangeably,
which confuses this distinction. For example many deposit accounts are
labeled as investment accounts by banks for marketing purposes. Whether an
asset is a saving(s) or an investment depends on where the money is
invested: if it is cash then it is savings, if its value can fluctuate then
it is investment.
Real estate
In real estate, investment is money used to purchase property for the sole
purpose of holding or leasing for income and where there is an element of
capital risk. Unlike other economic or financial investment, real estate is
purchased. The seller is also called a Vendor and normally the purchaser is
called a Buyer.
Residential Real Estate
The most common form of real estate investment as it includes the property
purchased as peoples houses. In many cases the Buyer does not have the full
purchase price for a property and must engage a lender such as a Bank,
Finance company or Private Lender. Different countries have their individual
normal lending levels, but usually they will fall into the range of 70-90%
of the purchase price. Against other types of real estate, residential real
estate is the least risky.
Commercial Real Estate
Commercial real estate is the owning of a small building or large warehouse
a company rents from so that it can conduct its business. Due to the higher
risk of Commercial real estate, lending rates of banks and other lenders are
lower and often fall in the range of 50-70%.