Business, Legal & Accounting Glossary
As per investment theory, investment is an alteration in capital stock during a certain period. Investment theory also states that investment is a flow term unlike capital, which is a stock term. This implies that capital is calculated taking into account only a certain point of time, but the investment is calculated over a long period of time.
Investment flows for a certain period of time and can be computed as the difference of capital stock between end and beginning.
There are two major types of perspectives of looking at investments – Keynesian and Hayekian perspectives. As per Hayekian perspective, investment is an adjustment against equilibrium. This means that optimum investment is basically deciding upon a proper speed of making that adjustment. Keynesian approach to investment focuses less on adjustment and is more focused on behavioural aspects.
Irving Fisher has stated in his investment theory that all capital is basically circulating. This implies that total capital is employed in various processes related to production. This further states that all capital is an investment. His theory was later used by Friedrich Hayek in 1941.
There are several types of investment theories and plans that are employed by investors. The two main types of strategies include active strategies and passive strategies. Making an investment portfolio comprises of several important stages like asset allocation, diversification, and identifying asset classes.
Reduction of risks in the stock part of an investment portfolio comprises of theories like the law of large numbers, dollar-cost averaging, modern portfolio theory, and dividend reinvestment. Advanced strategies include the use of leverage, short sales, and options strategies.
As per the Keynesian theory of investment, interest rates are extremely important as far as investment activities are concerned. There are other areas of importance in Keynesian investment theory like profits that may be made from particular business activity.
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This glossary post was last updated: 29th March, 2020 | 320 Views.