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Investment or investing is a term with several closely-related meanings in business management, finance
Finance

The field of finance refers to the concepts of time, money and risk and how they are interrelated. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important....
 and economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
, related to saving
Saving (money)

In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. In a broader sense, saving is typically used to refer to economizing, cutting costs, or to rescuing someone or something....
 or deferring consumption
Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
. Investing is the active redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit.

An investment is the choice by the individual to risk his savings with the hope of gain.






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Investment or investing is a term with several closely-related meanings in business management, finance
Finance

The field of finance refers to the concepts of time, money and risk and how they are interrelated. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important....
 and economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
, related to saving
Saving (money)

In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. In a broader sense, saving is typically used to refer to economizing, cutting costs, or to rescuing someone or something....
 or deferring consumption
Consumption (economics)

Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally consumption is defined by opposition to Production theory basics....
. Investing is the active redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit.

An investment is the choice by the individual to risk his savings with the hope of gain. Rather than store the good produced, or its money equivalent, the investor chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits.

In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business.

In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change, the value of the asset and liability also change.

An asset
Asset

In business and accounting, assets are everything of value that is owned by a person or company. It is a claim on the property your income of a borrower....
 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. See . The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se.

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.

Business management

The investment decision (also known as capital budgeting
Capital budgeting

Capital budgeting is the planning process used to determine whether a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing....
) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value
Net present value

Net present value or net present worth is defined as the total present value of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects....
 of the investment to the enterprise is positive using the marginal cost of capital
Cost of capital

The cost of capital is an expected return that the provider of capital plans to earn on their investment....
 that is associated with the particular area of business.

In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times the goal of the investment is for producing future cash flows, while at others it may be for purposes of gaining access to more assets by establishing control or influence over the operation of a second company (the investee).

Economics

In economics
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
, investment is the production per unit time of goods
Good (economics and accounting)

In economics, a good is any object or service that increases utility, directly or indirectly. It should not to be confused with the adjective "good", as used in a moral or ethics sense....
 which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory
Factory

A factory or manufacturing plant is an industry building where workers manufacturing Good or supervise machines Process Manufacturing one product into another....
) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output
Measures of national income and output

A variety of measures of national income and output are used in economics to estimate total economic activity in a country or region, including Gross Domestic Product , Gross National Product , and Net National Income ....
, gross investment (represented by the variable I) is also a component of Gross domestic product
Gross domestic product

File:GDP nominal per capita world map IMF 2008.pngThe gross domestic product or gross domestic income is one of the measures of national income and output for a given country's economy....
 (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.

Both non-residential investment (such as factories) and residential investment (new houses) combine to make up I. Net investment deducts depreciation
Depreciation

Depreciation is a term used in accounting, economics and finance to spread the cost of an asset over the span of several years.In simple words we can say that depreciation is the reduction in the value of an asset due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay o...
 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
Capital (economics)

In economics, capital or capital goods or real capital refers to factors of production used to create goods or services that are not themselves significantly consumed in the production process....
. The time dimension of investment makes it a flow
Stock and flow

Economics, business, accounting, and related fields often distinguish between quantities which are stocks and those which are flows. A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have been capital accumulation in the past....
. By contrast, capital is a stock, that is, an accumulation measurable at a point in time (say December 31).

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
Opportunity cost

Opportunity cost or economic opportunity loss is the value of the next best alternative foregone as the result of making a decision. Opportunity cost analysis is an important part of a company's decision-making processes but is not treated as an actual cost in any financial statement....
 of investing those funds rather than loaning them out for interest.

Finance

In finance
Finance

The field of finance refers to the concepts of time, money and risk and how they are interrelated. Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important....
, investment is the commitment of funds by buying securities
Security (finance)

A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities , and stock securities; e.g., common stocks....
 or other monetary or paper (financial) assets in the money market
Money market

In finance, the money market is the global financial market for short-term borrowing and lending. It provides short-term market liquidity funding for the global financial system....
s or capital market
Capital market

The capital market is the market for security , where Corporation and governments can raise longterm funds. It is a market in which money is lent for periods longer than a year....
s, or in fairly liquid
Market liquidity

Market liquidity is a business, economics or investment term that refers to an asset's ability to be easily converted through an act of buying or selling without causing a significant movement in the price and with minimum loss of value....
 real assets, such as gold
Gold

Gold is a chemical element with the symbol Au and atomic number 79. It is a highly sought-after precious metal, having been used as money, as a store of value, in jewelry, in sculpture, and for ornamentation since the beginning of recorded history....
, real estate
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location., or collectibles. Valuation
Valuation (finance)

In finance, valuation is the process of estimating the potential market value of a financial asset or liability. Valuations can be done on assets or on liabilities ....
 is the method for assessing whether a potential investment is worth its price. Returns on investments
Rate of return

In finance, rate of return , also known as return on investment , rate of profit or sometimes just return, is the ratio of money gained or lost on an investment relative to the amount of money invested....
 will follow the risk-return spectrum
Risk-return spectrum

The risk-return spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment....
.

Types of financial investments include shares, other equity investment
Equity investment

Equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises....
, and bonds
Bond (finance)

In finance, a bond is a debt security , in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed Maturity ....
 (including bonds denominated in foreign currencies
Currency

A currency is a Medium of exchange, facilitating the trade of goods and/or Service s. It is coins and paper bills used as money. It is one form of money, where money is anything that serves as a medium of exchange, a store of value, and a standard of value....
). 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
Derivative (finance)

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else . The underlying on which a derivative is based can be an asset , an index , or other items ....
 or derivative
Derivative (finance)

Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else . The underlying on which a derivative is based can be an asset , an index , or other items ....
 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
Intermediary

An intermediary is a third party that offers intermediation services between two trading parties. The intermediary acts as a conduit for goods or services offered by a supplier to a consumer....
, such as bank
Bank

A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending money....
s, mutual fund
Mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, Bond , short-term money market instruments, and/or other security ....
s, pension fund
Pension fund

A pension fund is a pool of assets forming an independent legal entity that are bought with the contributions to a pension plan for the exclusive purpose of financing pension plan benefits....
s, insurance
Insurance

Insurance, in law and economics, is a form of risk management primarily used to Hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating los...
 companies, collective investment scheme
Collective investment scheme

A collective investment scheme is a way of investment money with other people to participate in a wider range of investments than those feasible for most individual investors, and to share the costs of doing so....
s, and investment club
Investment club

An investment club is a group of individuals who meet on a regular basis for the purpose of investing money.The invested sums can be as little as $10 a month....
s. 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
Personal finance

Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, personal budget, save, and spend monetary resources over time, taking into account various financial risks and future life events....
, money used to purchase shares, put in a collective investment scheme
Collective investment scheme

A collective investment scheme is a way of investment money with other people to participate in a wider range of investments than those feasible for most individual investors, and to share the costs of doing so....
 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
Investment risk

On ground of assurance of the return, there are two kinds of Investments - Riskless and Risky. Riskless investments are guaranteed, but since the value of a guarantee is only as good as the guarantor, those backed by the full faith and confidence of a large stable government are the only ones considered "riskless." Even in that case the...
 can cause a capital loss when an investment is realized, unlike saving(s)
Saving (money)

In common usage, saving generally means putting money aside, for example, by putting money in the bank or investing in a pension plan. In a broader sense, saving is typically used to refer to economizing, cutting costs, or to rescuing someone or something....
 where the more limited risk is cash devaluing due to inflation
Inflation

In economics, inflation is a rise in the general price level of goods and services in an economy over a period of time. The term "inflation" once referred to increases in the money supply ; however, economic debates about the relationship between money supply and price levels have led to its primary use today in describing price inflatio...
.

In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit account
Deposit account

A deposit account is a Current account at a banking institution that allows money to be deposited and withdrawn by the account holder, with the transactions and resulting balance being recorded on the bank's books....
s 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
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location., investment money is used to purchase property
Property

Property is any physical or virtual entity that is ownership by an individual or jointly by a group of individuals. An owner of property has the right to consumption, sell, Renting, mortgage, transfer and exchange his or her property....
 for the purpose of holding or leasing for income and there is an element of capital risk.

Residential real estate

The most common form of real estate investment as it includes property purchased as a primary residence. 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 consists of multifamily apartments, office buildings, retail space, hotels and motels, warehouses, and other commercial properties. Due to the higher risk of commercial real estate, loan-to-value ratios allowed by banks and other lenders are lower and often fall in the range of 50-70%.

See also


External links