What Is Investment
Investment (English Investment) – the placement of capital for the purpose of making a profit. Investment is an integral part of the modern economy. Investments differ from loans in the degree of risk for the investor (lender) – the loan and interest must be repaid within the agreed timeframe, regardless of the profitability of the project, investments (invested capital) are returned and generate income only in profitable projects. If the project is unprofitable, investments may be lost in whole or in part.
Investments – cash, securities, other property, including property rights, other rights that have a monetary value, invested in objects of entrepreneurial and (or) other activities in order to obtain profit and (or) achieve another useful effect. KR McConnell and SL Brue in their book Economics defined investment as the cost of manufacturing and accumulating means of production, as well as increasing inventories.
Investment activity – investment and implementation of practical actions in order to obtain profit and (or) achieve another useful effect.
From the standpoint of the monetary theory of money, funds can be directed to consumption or savings. Simple saving withdraws funds from circulation and creates preconditions for crises. Investing, on the other hand, involves savings in circulation. It can occur directly or indirectly (placing temporarily free funds on a deposit in a bank that already invests itself).
Investment concept in simple words
The easiest way to understand what an investment is is by using bank deposits as an example. The owner of the money entrusts his savings to a financial institution for a certain period. At the end of the agreed period, the funds are returned to the investor, and the interest for their use is paid. This option is as safe as possible because the bank independently finds projects on which it earns from borrowed funds.
Investment activity carries great risks if one approaches investments without a thorough audit of projects.
The most popular areas for investment:
- Purchase of land plots.
- Acquisition of real estate, including non-residential / industrial premises.
- Reconstruction of existing buildings, their major overhaul.
- Investments in a ready-made business (own or someone else’s).
- Purchase of copyrights, patents, licenses, and other intangible assets.
Not all types of investments are available “directly” for private investors. As in the case of a bank, there are organizations that raise funds from individuals, which, as they become available, are distributed among the funded commercial projects.
The difference between financial and real investments
There are many ways to invest. In addition to purchasing equipment for expanding production, residential real estate for its subsequent lease, there is an option to purchase securities – stocks, bonds, bills. The latter requires the investor to have a good knowledge of the financial market, the influence of various fundamental processes on the rise/fall in the value of purchased assets.
All types of investments encountered are divided into two conditional groups:
- Investments in inventories, fixed assets, and intangible assets.
- They become an independent form of investment by issuing shares, bills of exchange, and other securities presented on the market in the form of a “commodity”.
The first option is more common in commercial organizations, where the profit can either be displayed in the form of profit or be invested in the development of your own company or in the opening of new areas of activity. The second option is more suitable for private investors. When investing in securities, the risks of incurring significant losses are lower, since professionals actually manage the funds.
Investment attraction options
Over time, any enterprise is faced with the problem of falling profitability. If this factor is not calculated in advance, management may face the fact that the only option is to liquidate (bankrupt) the company. This can be avoided with timely modernization/reorganization of the company or expansion of activities. But all this requires the attraction of additional funds.
According to the source of income, investments are divided into the following categories:
- You can count on them if you organize the issue of the company’s shares, ensure their entry to the market, and create attractiveness for investors.
- Local and federal authorities are usually interested in the development of innovative activities, therefore, they subsidize certain areas at the expense of public funds.
- May be needed to expand activities abroad or to receive funds at lower interest rates, which is more typical for European / American banks.
Regardless of the source of financial support, a preliminary audit of the project is required, the calculation of probable profits, including taking into account all possible risks. Based on a detailed study, a decision is made on the profitability of the proposal.
Drawing up an investment portfolio
The smallest risks can be guaranteed only by dividing investments between several types of assets. Moreover, it is recommended to select highly risky types with the likelihood of getting large profits in a short time, along with less risky options, where the stake is placed on stability (albeit with a lower level of profitability).
When selecting assets for investment, the following indicators are assessed:
- Difficulty in assessing profitability/risk. Both the availability of data on the previously obtained profit and the ability to predict the further development of the situation play a role.
- The degree of risks (directly affecting the level of income).
- Investment costs. This takes into account the minimum share required to invest in an asset (starting amount).
- Assess the possibility of selling assets at market prices in crisis situations.
- Income predictability. The degree of “transparency” largely depends on the knowledge of the investor himself, how much he understands external/internal factors that affect the value of assets.
The declared profitability of the project remains the key parameter. Its average value in the investment portfolio allows you to compare it with the total risks, to select such a list of instruments so that in case of negative developments, the investor would receive at least a minimum profit.
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