Investment involves the employment of funds with the aim of achieving additional income growth in values. Thus, the investment may be defined as a commitment of funds made in the expectation of a positive rate of return.
Financial and Economic Meaning of Investment
Financial Meaning: Investment is the employment of a person’s funds to derive future income in the form of interests, profit, dividend, premium, pension benefits or appreciation in the value of their capital.
For example, purchasing shares, debentures, post office saving certificates are all investments in the financial sense.
Economic Meaning: Investment means the net addition to the economy’s capital stock which consists of goods and services that are used in the production of other goods and services.
For example, the formation of new and productive capital in the form of constructions, plants, and machinery, inventories, etc.
Financial investments generate financial assets while economic investments generate physical assets.
The two types of investments are, however, related and dependent. The money invested in financial investments is ultimately converted into physical assets. Thus, all investments result in the acquisition of some assets either financial or physical.
Characteristics of Investment
An investor generally prefers liquidity for his investments, the safety of his fund, a good return with minimum risk, or minimization of risk and maximization of return.
Alternatively, all investments are characterized by
(i) return, (ii) risk, (iii)safety (iv) liquidity.
(i) Return: Investment is made with the primary objective of deriving a return. The return may be received in the form of yield plus capital appreciation.
(ii) Risk: Risk is inherent in any investment. The risk may relate to the loss of capital, delay in repayment of capital, non-payment of interest, or variability of returns.
(iii) Safety: Safety is another feature that an investor desire for his investments. Every investor expects to get back his capital on maturity without loss and without delay.
(iv) Liquidity: An investment that is easily saleable or marketable without loss of money and without loss of time is said to possess liquidity. An investor generally prefers liquidity for his investment. Some investment instruments, like debentures and preference shares, are easily liquid able, and others are not, such as bank deposits or post office deposits.
Objectives of Investment
The objectives of an investor can be stated as follows:
(1) Maximization of return
(2) Maximization of risk
(3) Hedge against inflation
Definition: Speculation involves trading a financial instrument involving high risk, in expectation of significant returns. The motive is to take maximum advantage of fluctuations in the market.
Description: Speculators are prevalent in the markets where price movements of securities are highly frequent and volatile. They play very important roles in the markets by absorbing excess risk and providing much-needed liquidity in the market by buying and selling when other investors don’t participate.
Investment vs Speculation
Investment and speculation are two terms that are closely related. Both involve the purchase of assets like shares and securities aiming at a good return. However, they are different from each other based on three factors. They are-
(2) Capital gain
(3) Time period
The investment avenues can be broadly categorized under the following heads:
(1) Corporate securities
(2) Deposit in banks and non-banking companies
(3) Investment in mutual fund
(4) Post office deposits and certificates
(5) Life insurance policies
(6) Provident fund scheme
(7) Government and semi-government securities