Last updated on April 11th, 2024 at 01:15 am
Times have changed; we have moved from keeping cash at home to banks to a digital era. Previously, people used to deposit their money in banks to keep it safe and earn a little interest. Nowadays, people invest their money with the expectation of capital growth.
That raises the question of what is investment? In this article, I will answer the question of what is investment.
What is Investment?
Investment can be defined as deploying capital on specific assets with the goal of capital appreciation—for example, fixed deposits, real estate, shares, bonds, and similar investment assets.
The person purchasing the asset is known as the investor. When investors purchase any asset, they expect the value of the asset to increase over time. Usually, the value of assets fluctuates up and down in value. The investor aims to sell the assets when the asset’s market value exceeds its intrinsic value.
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Now that we are aware of the meaning of what is investment, let’s see the objectives of investment.
Investment Objectives
After understanding what is Investment, let’s understand why people invest their funds. The investment objectives are categorized into 2 main categories – Primary and secondary. We will discuss both in detail.
Primary Objective
The primary objective is further divided into two parts – Risk and return.
Risk Reduction
The main objective of an investor could be to reduce risk on their investment. Every investor wants to receive an extreme return on investment with the lowest level of risk.
Some investors want to play it safe and are okay with fewer returns. These investors are risk neglecters and keep a safe investment portfolio.
Higher Return
Another one of the primary objectives of investment is the return. Ofcourse, investors want an extreme return on their investments. Many investors are more interested in higher returns and are ready to face a high risk. These are called risk-loving individuals.
Secondary Objectives
There are a total of three secondary objectives.
Safety
One of the reasons people invest is to keep their idle money safe. This could be for the future, some future investment, or any other purpose. When the money is invested in an asset, it gets locked and can only be taken out when the investor pulls out.
Liquidity
Another reason for investment could be liquidity. Investors can invest in highly liquefiable assets, so they can easily convert them into cash when required. Gold is one of the best examples of such investments.
Hedging against Inflation
Investors also invest their capital as savings for capital appreciation against inflation. The value is expected to decrease when the money is kept idle for a long time. To keep the value afloat in the market, people invest their capital.
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After knowing about What is Investment? and its objectives, let us see the factors that affect an individuals investment decisions.
Factors Affecting Investment Decisions
1. Risk
The first factor which affects an investor’s decision is the risk factor. They will opt for specific investments depending on the investor risk preferences. Is the investor a risk lover? Risk moderator? Or a risk neglector? Depending on their choices, people make their investments.
2. Liquidity
What is Investment liquidity? Liquidity is the asset’s ability to be converted into cash. Investors look into the liquidity of the assets to be aware of the time taken to convert the asset into cash.
3. Availability of Funds
One of the main factors affecting the investor’s decision is the availability of funds. The more capital the investor has, The more significant asset they can invest in. And opposite that, if there’s a specific budget to the investment, investors make more calculated and small investments in small-cap funds.
4. Investment horizon
Are you familiar with what is investment horizon? If not, it is the period for investment. Investors can make long-term and short terms investments depending on their investment objectives.
If investors want to save up and want capital growth on their investment against inflation, they tend to go for long-term investments. People who wanna make quick bucks opt for short-term trading.
5. Return
And, of course, the return on capital. Every investor wants to earn high. Return and risk are co-dependent on each other. The higher the risk, the higher the reward, and vice versa.
Now, onto the last part of this article about What is Investment? That is the types of investments.
Types of Investment
Autonomous Investment
Autonomous investments refer to a type of investment in which the capital amount remains constant. Even if there is fluctuation in earnings, the investment amount will remain constant. Monthly mutual fund SIP is one example of autonomous investment.
Induced Investment
Induced investment is the opposite of autonomous investment. Here, the investment level changes along with the earning. The income level is positively related to the investment. For example, a business with growing profits would need higher capital investment in its assets.
Financial Investment
Funds employed to buy financial instruments such as bonds, shares, and other securities are called financial investments.
Real Investment
The investments made in machinery, land, factories, and other similar assets are called real investments. Real investments in such assets also contribute to economic growth and employment generation.
Planned Investment
The investments made with a particular plan to accomplish a particular goal are called planned investments. Planned investment happens when the investor invests with a solid plan. Planned investment is also called intended investment.
Unplanned Investment
As the name suggests, investments made without any plan or intention are unplanned investments. Unplanned is also called an unintended investment. In this type of investment, the investor has no specific goal or plan.
Gross Investment
Gross investment refers to the total capital employed to create new assets such as machinery, buildings, houses, etc. It refers to all the expenditures done during the process. Gross investment is calculated for a specific time.
Net Investment
Net investment is the total gross investment minus the depreciation during a specific time.
Now that you are aware of what is investment, you may also want to read about What is securities in finance? In easy words.
FAQs
Which investment is best for someone likely to need cash soon?
Invest in debt instruments, bank fixed deposits, or corporate bonds for higher liquidity. You can easily convert them into cash in a short period.
What is investment banking?
Investment banking is a separate field in banks. This field helps their clients by providing financial consultancy services. They act as the link between the investors and firms in the market.
Closing Statement
Investment has become a necessary process for everyone. It may be for capital appreciation against inflation, profit earning, saving, or other reasons. It is always recommended that you invest in certain assets for your future.
When we talk about what is investment? we should not forget the main investment option – The stock market. The stock market is the way to go if you want high returns and are ready to take risks. If you want to play it safe and are satisfied with fewer returns, go for fixed deposits, bonds, and other debt securities.
I hope this article about What is investment is helpful to you. If you have any doubts or suggestions, risk it and comment in the comment box.
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