What is investment in simple terms
For a considerable part of history and nowadays, investments are an integral part of the economy, without which it cannot fully exist and develop. If we talk about what investment means in simple words, we can say that it is an investment made by a private person, company or state in order to make a profit. At the same time there is no guarantee that these investments will pay off – this is the main risk of investing.
What is investment
There are several definitions of this concept, but their essence is the same. Investments are investments of capital, which can be represented by:
cash (including in the form of loans, borrowed from a bank or private individuals);
tangible property (land, other real estate, production equipment, machinery, and much more)
securities (shares, bonds, bills of exchange)
property rights (e.g. lease of premises);
intangible assets (intellectual property, copyrights, patents for inventions, etc.).
In a broad sense, the meaning of the concept of investment can be described as an investment (“sacrifice”) to achieve specific goals. And these goals do not necessarily have to relate only to obtaining a commercial benefit. For example, the state invests certain funds in the development of children’s sports, the construction of playgrounds for young people to join a healthy lifestyle. Ultimately, this does not lead to a specific income, but health is an unconditional value, which has also a commercial benefit (the cost of maintaining the health care system is reduced).
Types of investments
There are many criteria on the basis of which investments are classified. They are divided according to the object of investment, purpose, timing and many other parameters.
According to the object of investment
Regardless of the source of assets (own funds, bank loans, personal property, etc.), it is possible to invest in a specific object, such as businesses or real estate. In this case we talk about real investments, i.e. investments in the real sector of the economy. This means that real investment is aimed at direct purchase of capital in the form of:
tangible property (real estate, land, production equipment, cars, etc.);
intangible assets (the purchase of a patent or license to use an invention, a piece of music, the purchase of a trademark, etc.)
human capital (maintenance of health care system, education, investments in projects to develop children’s creativity, sports, programs for retraining of employees and much more);
ready-made business – this is the most expensive investment (a ready-made company, enterprise, infrastructure object, etc. is purchased).
Real investments can only mean the purchase of ready-made capital, most often they are tangible assets. Along with them there are financial investments:
The purchase of securities (shares, bonds and others);
granting loans – this is the main type of investment by banks;
granting of insurance to private or legal persons – insurance investments;
granting of leasing – a special loan for the purchase of enterprises, equipment, vehicles, which are not the object of ordinary consumption.
A separate group includes speculative investments, when assets are purchased not for their use, but only to change the price (i.e., income can be obtained through speculation). These are purchase of:
Precious and rare-earth metals (anyone can make such an investment and open a bank account for gold, platinum and other precious metals).
Real investments also include venture capital investments. For example, the purchase of new businesses (start-ups), the purchase of risky securities. Such investments are characterized by high risk, but at the same time they provide an opportunity to receive a very large profit. One popular example today is the purchase of cryptocurrencies (Bitcoin, etc.).
By type of investor
The structure of types of investments also includes the notion of the owner of capital, i.e. the source of these investments. The investor can be any person:
a private citizen with quite a lot of savings;
an individual entrepreneur;
In all these cases, we talk about private investment, meaning that the money does not come from the state, but from other sources. The state itself can also be an investor – in this case, budgetary funds are invested. Often the state attracts not only its own money, but also the capital of private investors – then it is a financial partnership and mixed investments.
Separately, there are domestic and foreign investments. In the first case, the money comes exclusively from domestic resources, in the second – from abroad. The volume of foreign investments depends on the investment climate of the country, which is determined by the level of economic development, social and political order in the state. This indicator is important for the development of the country as a whole: the more money is invested in it, the faster the prosperity of private businesses and citizens grows.
According to the main purpose of investment
The main purpose of any investment is to obtain a commercial profit, increase production, promote goods and services. However, there can be several ways to achieve this main task. Depending on this, there are such types of investments:
Direct – this is synonymous with the concept of real investment. Funds are invested in material production in order to participate in the management of a production enterprise or commercial company. Usually, the investor acquires a controlling block of shares and thus influences the adoption of all key decisions on the development of the joint-stock company.
Portfolio is associated with the purchase of securities. Usually several types of these assets are purchased at once; they are bought as a whole set, or portfolio, hence the name. In this portfolio there are more and less profitable securities that involve more and less risk. A characteristic feature – the investor does not participate in the management of the firm, but only expects to receive a certain income (at the same time he takes the risks, too).
Intellectual investments are associated with the training of its employees, their retraining, and the acquisition of new skills that will be useful in their work. For example, the company sends employees on business trips to exchange experience, invests in learning English, etc.
In terms of investment timing.
Generating income should almost always be a part of investing. However, the immediate generation of profit takes time, because the immediate return of funds is not possible. Depending on the payback time of a project, there are these types of investments:
Short-term, when the income can be obtained during the first year. Typically, these are small businesses, small firms that provide services that are in high demand.
Medium-term investments involve generating revenues over a period of 1 to 3 years. At the same time, all investments can also pay off, i.e. the enterprise will reach the level of profitability. These are larger stores, small manufacturing enterprises.
Long-term investments involve obtaining the first income after 3-5 years or more. These are large industrial complexes, stadiums, infrastructure facilities, etc. They usually require large investments, so private business funds, money from the state budget and bank loans are attracted here.
The 5 rules of investment
There are many principles of investment, but their general essence boils down to the fact that the investor must intelligently allocate its risks and foresee all the threats if possible. This requires:
know well the object of investment, understand all its features, as well as possible threats;
be familiar with the economic indicators of the country and the region;
understand the current market situation (conjuncture);
not risk too much, i.e., not to invest money that cannot be recovered in case of unforeseen circumstances;
make a clear investment plan with a detailed description of each step and risk analysis (scenarios for one or another case).
Is it worth investing in a business
Answering this question is difficult because you need to understand
what kind of business we are talking about;
What amounts of investment the investor is willing to provide;
what risks this type of business may face at the moment and in the foreseeable future (1-3 years).
Obviously, in most cases investing in a business involves a lot of money. However, a private person with little savings can also open a small business or buy shares in a large company. This requires a good understanding of the business to adequately assess the prospects for its development. It is worth investing only in large projects – for example, to buy shares in proven companies which have been on the market for several decades.
Pros and cons of investing: returns and risks
There are quite a few advantages of investing, but they can all be reduced to one. Investments provide an opportunity to receive almost unlimited income. If correctly calculate the risks and direct funds in the right direction, you can quickly recoup investments and earn a profit, which is significantly higher than traditional methods of investment (bank deposits, leasing real estate, etc.). In addition, the following features can be attributed to the pluses:
the investor can distribute its risks, i.e. receive income from different sources and thus insure against unforeseen circumstances;
investments can give not only active but also passive income: money “works” independently and brings “automatic” profit;
the investor gets the opportunity for personal development;
due to investment, the investor can self-realize and manage his resources more freely.
However, the investment system has a significant disadvantage – there are no guarantees that the investment will pay off. Therefore, the investor assumes all risks (or shares them with partners, if it is stipulated in the contract). Weaknesses of investments:
constant and stable income is not possible in all cases;
there is a real danger of losing all funds;
it is possible to invest only on the condition that the investor is well versed in the chosen sphere (in construction, small businesses, etc.)
to start investing need at least small savings, although in most cases you will need very large sums.
The essence of the concept of investment boils down to the investment of funds or other capital to make a profit over a certain period of time. The investment is always in a certain ratio with the risk, because there are no win-win financial strategies, and it is impossible to foresee all the circumstances in advance. However, investments are the main source of economic growth, so it is impossible to increase one’s income without investments.
What is investment in simple terms