Investment

From Wikipedia, the free encyclopedia Jump to: navigation, search For other uses, see Investment (disambiguation). Investment is the commitment of money or capital to purchase financial instruments or other assets to gain profitable returns in the form of interest, income {dividend}, or appreciation of the value of the instrument.[1] It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance no matter for households, firms, or governments. An investment involves the choice by an individual or an organization such as a pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g. futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time.[2] Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner's control. The difference between speculation and investment can be subtle. It depends on the investment owner's mind whether the purpose is for lending the resource to someone else for economic purpose or not.[3] In the case of investment, 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 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.[4] 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. 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.

Contents
[hide]

1 In economics or macroeconomics

r).business management The investment decision (also known as capital budgeting) 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.business management 3 In finance 4 Real estate as the instrument of investment o 4. where C is consumption. Inventory investment refers to the accumulation of goods inventories.[5] [edit] Investment related to business of a firm . Net fixed investment is the value of the net increase in the capital stock per year. These assets may be physical (such as buildings or machinery). Investment in human capital includes costs of additional schooling or on-the-job training. Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I.NX). The time dimension of investment makes it a flow. G is government spending. Investment is often modeled as a function of Income and Interest rates. Examples include railroad or factory construction.C . Fixed investment. given in the formula GDP = C + I + G + NX. software. and NX is net exports. investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production. and it can be intended or unintended.1 Residential real estate o 4.G . and net exports are subtracted (i. Assets are used to produce streams of revenue that often are associated with particular costs or outflows. gross investment (represented by the variable I) is also a component of Gross domestic product (GDP). or financial (see below). the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.• • • • • • 2 Investment related to business of a firm . goodwill). Net investment deducts depreciation from gross investment. as expenditure over a period of time ("per year"). capital is a stock— that is. By contrast. is not capital. In measures of national income and output. given by the relation I = f(Y. government spending. I = GDP .2 Commercial real estate 5 See also 6 Notes 7 External links [edit] In economics or macroeconomics In economic theory or in macroeconomics. accumulated net investment to a point in time (such as December 31). Thus investment is everything that remains of total expenditure after consumption. Even if a firm chooses to use its own funds in an investment. An increase in income encourages higher investment. whereas a higher interest rate may discourage investment as it becomes more costly to borrow money.e. intangible (such as patents. All . it can be positive or negative.

. and bonds (including bonds denominated in foreign currencies). Returns on investments will follow the risk-return spectrum. Saving within personal finance refers to money put aside. collective investment schemes. the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business. money used to purchase shares. investment is the commitment of funds by buying securities or other monetary or paper (financial) assets in the money markets or capital markets. and so are not considered assets. This distinction is important. such as banks. as investment risk can cause a capital loss when an investment is sold. unlike saving(s) where the more limited risk is cash devaluing due to inflation. investment money is used to purchase property for the purpose of holding or leasing for income and there is an element of capital risk. they are often studied as or treated as investments. 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). mutual funds. these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. 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. such as gold or collectibles.together. pension funds. which confuses this distinction. In terms of financial assets. if its value can fluctuate then it is investment. In many instances the terms saving and investment are used interchangeably. Within personal finance. since their cash flows are closely related to (or derived from) those of specific securities. other equity investment. or strictly speaking. and may increase or decrease in value giving the investor capital gains or losses. Types of financial investments include shares. each of whom receives a claim on the intermediary. [edit] In finance In finance. or in fairly liquid real assets. At times the goal of the investment is for producing future cash flows. insurance companies. [edit] Real estate as the instrument of investment In real estate. normally on a regular basis. and investment clubs. Though their legal and procedural details differ. These financial assets are then expected to provide income or positive future cash flows. Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows. Nevertheless. an intermediary generally makes an investment using money from many individuals. Valuation is the method for assessing whether a potential investment is worth its price. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Investments are often made indirectly through intermediaries. securities or investments.

and other commercial properties. In many cases the buyer does not have the full purchase price for a property and must engage a lender such as a bank. Different countries have their individual normal lending levels. finance company or private lender.[citation needed] [edit] See also • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Alternative investments Appreciation Capital (economics) Capital accumulation Capital strike Diversifying investment Divestment Dollar roll Financial economics Foreign direct investment Gambling Gold as an investment Investment-specific technological progress Investor profile Investor relations Reforestation Green Investments List of accounting topics List of countries by gross fixed investment as percentage of GDP List of economics topics List of economists List of finance topics List of financial services companies (by country) List of management topics List of marketing topics Market trends Megaproject Optimism bias Over-investing Philatelic investment Psychology of previous investment . loan-to-value ratios allowed by banks and other lenders are lower and often fall in the range of 50-70%. residential real estate is the least risky.[edit] Residential real estate The most common form of real estate investment as it includes property purchased as a primary residence.[citation needed] [edit] Commercial real estate Commercial real estate consists of multifamily apartments. Against other types of real estate. but usually they will fall into the range of 70-90% of the purchase price. office buildings. Due to the higher risk of commercial real estate. retail space. hotels and motels. warehouses.

arthur. McGraw-Hill Book Company. 271.cfm? locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PM DbProgramId=12881&level=4. Security Analysis. Benjamin. and David Dodd (1951).pearsonschool.a. ROI) Reference class forecasting Regulation Fair Disclosure Right-financing Risk Saving Silver as an investment Socially responsible investing Speculation Stock trader Strategic misrepresentation Tangible investments Value investing [edit] Notes 1.).com/index.com 5. ISBN 0071448209 4. Economics: Principles in action.• • • • • • • • • • • • • Rate of return (ROR. Hassett (2008. Steven M. pp. Sheffrin (2003). ^ Graham. 2. http://www. Library of Economics and Liberty. Upper Saddle River. ^ Kevin A. ISBN 0071448209 3. ^ Invest on etymonline. a. ^ Graham and Dodd (1951). [edit] External links • Investing at the Open Directory Project . ISBN 0-13-063085-3. "Investment. 2nd ed. New Jersey 07458: Pearson Prentice Hall. McGraw-Hill Book Company.k. Security Analysis." The Concise Encyclopedia of Economics. ^ Sullivan.