Investments – 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 returned 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 make a 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 an increase in inventories .
Investment activities – investment and implementation of practical actions in order to obtain profit and (or) achieve another beneficial 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 take place directly or indirectly (placing temporarily free funds on a deposit in a bank that already invests itself).
Investment or speculation
The line between investment and speculation is blurred. Usually, the time factor is indicated as a differentiation criterion. If the operation lasts more than a year – this is an investment, and it will give an economic effect long after the investment.
If up to a year – this is speculation. For example, The Modern Economic Dictionary indicates:
Investments – “long-term investments” of public or private capital in their own country or abroad for the purpose of generating income in enterprises of various industries, entrepreneurial projects, socio-economic programs, innovative projects.
At the same time, when they talk about exchange trading, they talk about attracting, for example, “portfolio investors” who are sensitive to the situation on the market and can leave it, not paying attention to the duration of transactions.
By the nature of the contracts concluded, the actions performed, the goals, the legal consequences, exchange investments, and speculations do not differ.
Benjamin Graham suggested that an investment should be considered an operation based on a thorough analysis of the facts, prospects, safety of the investment, and sufficient income. Everything else was considered speculation.
Often, the distinction is made according to the criterion of organizing a new business (real investment, funds are spent on the purchase of equipment, raw materials, personnel training) or participation in an existing business (speculation, funds are spent on the purchase of corporate rights, securities).
Sometimes the criterion for separation is the purpose of the operation. Speculation is considered to be an operation whose goal is the difference in price (of a stock, a share, a commodity). The deal can take a long time, but income is generated only once when the asset is sold or redeemed. An investment is a transaction, the purpose of which is income in the form of interest (dividends) accrued on the acquired asset. Accruals are systematic and the circulation time of the purchased asset is not limited.
Attraction of investments
It is believed that in order to attract investment, an enterprise must:
- Have a well-developed and forward-looking plan for the future. Investors want to know that their investments will bring profit in the future.
- Have a good reputation in the community. Investing in a shadow enterprise, investors run the risk of being left without profit, so they choose only those enterprises that inspire confidence.
- Conduct an open, that is, transparent activity. This requires accounting and media relations.
- Much depends on the domestic policy pursued in the country in which the enterprise is located. Investors choose the most stable countries for their deposits.
However, in practice, these conditions are necessary for portfolio investors. Investments may well be attracted without these conditions, but with the investor’s confidence in observing his rights to manage capital and profits. Such confidence can be guaranteed not only by laws and transparency of accounting but also personal connections, for example, in the government or parliament, obtaining the right to direct control over the situation at the enterprise through a controlling stake and the appointment of a supervised director or personal direct management. An essential factor in attracting investment is the ratio of profit and risk. Some investors choose a lower risk, agreeing to a lower profit (and vice versa). Raw materials companies do not have to choose at all: they go where there is a resource.
In addition, special conditions are sometimes created to attract investment. An example of the creation of such special conditions is special economic zones (SEZ). For example, in Russia SEZ “Lipetsk”, SEZ “Alabuga”, SEZ “Togliatti”, and others have been created and are currently operating.
The set of conditions for an investor is sometimes referred to as the “investment climate”.
Pros and cons of attracting investment
At the initial stage, external investments provide companies with two main advantages:
capital that allows you to move to the next stage of development;
improve the quality of management, in particular by strengthening discipline and adjusting strategy.
Risk and reward
Investments are characterized, among other things, by two interrelated parameters: risk and profitability (profitability). As a rule, the higher the risk of an investment, the higher its expected return should be. The CAPM is often used to describe the relationship between risk and reward.
The value of investment risk shows the likelihood of losing investments and income from them. The value of the total integral risk consists of seven types of risk: legislative, political, social, economic, financial, criminal, environmental. In this case, the average Russian risk is taken as a unit, and the real indicators of the regions may deviate.
The conditions for doing business in a particular country (they are also called the investment climate) have a great influence on the amount of investment. The most important indicators of a favorable investment climate are guarantees of respect for property rights, predictability, and stability of the business environment.