What Is Investment?

Investment refers to allocating resources such as money or credit into something which can generate income or add value over time, such as purchasing shares in a company or property.

Investing can be an excellent way to reach financial goals, but it is vital that you develop a spending plan and understand your risk tolerance before beginning this path.

Table of Contents

Definition

Investment refers to any practice undertaken today with an eye toward reaping a greater return later. It may involve purchasing assets like bonds, stocks or real estate property or investing your time and energy towards something that can produce future income, such as higher education.

“Investments” refers to assets expected to appreciate over time. This may occur due to changes in market conditions (for instance, an artist becoming more popular), or because improvements have been made directly to an asset (e.g. buying an inexpensive property and renovating it to increase its value).

Individuals investing should first create a spending plan to ensure they can afford their monthly expenses. This will prevent taking on too much risk with their investments and potentially losing money.

Purpose

Investments are assets purchased with the intention of reaping greater returns later, postponing consumption in favor of greater future gains. Individuals or entities can invest to meet financial goals such as income shortages, debt repayment or education loan payments.

Investment assets provide another means of expanding one’s money through interest and dividend payments, with profits being reinvested back into the asset to generate further returns – known as compounding.

As part of investing, it’s essential to evaluate both your risk tolerance level and financial goals when selecting investments. If you prefer lower risk options such as stocks or real estate, higher-risk investments may offer higher returns; however, they also come with greater potential risks of loss.

Types

Individuals invest to increase financial independence and achieve personal goals. Selective investments may yield inflation-beating returns while meeting short-, medium- and long-term financial requirements.

Investors can select growth- or fixed income investments. Growth investments aim to increase in value over time while fixed income investments offer steady streams of income or capital appreciation.

Equity, debt and cash equivalents are the three major forms of investments. Equity investments often take the form of stocks which represent ownership shares in companies. Stock investments often provide returns through price fluctuation or dividend payments but can be volatile investments. Bonds offer similar returns with fixed rate of return loans made out to companies or governments for fixed periods of time.

Risks

Investment risk refers to the possibility of loss due to fluctuations in security prices like bonds, shares, or real estate that fall below fair value. It applies to all forms of investments and can be reduced by diversifying across industries, asset classes and regions.

Credit risk refers to the possibility that a company or government entity will fail to meet interest and principal payments on debt investments such as bonds issued by it. Government bonds often carry lower credit risks.

Liquidity risk occurs when investments cannot easily be sold for cash due to no market or high costs associated with selling, particularly with hard assets or private equity investments that require extra time and costs for liquidation. Investors require higher returns from these illiquid investments as compensation for this additional effort required in liquidating them.

Returns

Ideal investments generate returns that exceed inflation rates; however, due to low interest rates it can be challenging to locate savings accounts offering high real returns.

Risk and return are inextricably linked. High-risk investments may provide higher profits, but also come with greater chances of losses. Finding an investment with an optimal combination of risks and returns depends on both your tolerance for risk and appetite for growth.

Total Return (TR) or Yield of an Investment refers to the sum of its income (interest and dividends) and capital gains (price increases) over a set period, often expressed in percentage form. Maximizing TR can be accomplished by diversifying portfolios while decreasing correlation among securities in your holdings.