Business, Legal & Accounting Glossary
In finance and business, an investment is an asset purchased for profit, whether via income, or capital appreciation, or some combination. The entity making the investment is an investor. The opposite of making an investment, or selling the asset, is divestment. Investment has a connotation of a long-term holding period, in contrast to speculation, which is the purchase of assets seeking profit from short-term price movements. In practice, no precise definition distinguishes between investment and speculation. The expected return on investment, or expected ROI, is a measure of the attractiveness of an investment, whether anticipated or realized. In economics, investment represents capital expenditure by companies in an economy or economic model. In this context, investment is distinct from consumer expenditure, government expenditure, and net exports.
Investment is an important concept in economics. It is primarily connected to saving as well as consumption. Investment is defined as the purchase of new capital, which exposes a business to risk. The primary motive behind any form of investment is to make profits.
There are several ways in which investments may be made. An investor normally uses any good or financial resources at his possession in order to make investment instead of storing them. They can generate durable consumer goods and might also lend that particular good or financial resource to another individual or entity with a profit-making motive.
In the case of durable goods, the investor expects a better lifestyle as a result of financial resources generated by trading that group of consumer goods. In the case of resources, the investor turns into an entrepreneur. He creates goods and services with those financial resources and tries to generate sufficient profits.
At times investors may also operate as money lenders using their financial resources to create profits by charging interest on money lent by them. People who hold a certain amount of ownership in a business enterprise are also regarded as investors.
In describing macroeconomics, investments are often represented by “I”. During an economic downturn, investments are more strongly affected than consumption.
Investments are normally categorised according to their [risk] profile, and the chance they have to deliver high returns – their risk-reward profile. The major categories of investment are:
Real estate investment has become an increasingly larger part of many investment portfolios, although property values have declined rapidly during the Financial Crisis. It involves the identification of investment properties, either commercial or residential, which can generate good rental incomes and/ or capital appreciation.
There are a number of different investment strategies and analysis approaches that investors use.
Fundamental analysis is the study of the economic and business performance of the asset being analyzed, while technical analysis focuses on technical factors in the movement of prices and volumes of transactions.
Value investing focuses on the identification of underlying assets which are cheap relative to their inherent value, whereas growth investing targets high growth companies or assets.
Investing is typically thought of as long term capital formulation and growth, whereas the shorter-term buying and selling of assets is usually defined as trading.
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This glossary post was last updated: 27th March, 2020 | 2 Views.