Investment

Investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption.

Investment is the choice by the individual to risk his savings with the hope of gain. Rather than store the good produced, or its money equivalent, the investor chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits.

In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business.

In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change, the value of the asset and liability also change.

An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. See Invest. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se.

Types of investments

The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

Broadly speaking, there are six main types of investments available in the Australian marketplace:

	Cash & Fixed Interest investments
	Bonds
	Shares
	Property
	Managed funds
	Superannuation

Cash & Fixed Interest investments
Cash investments are the most common form of investment in Australia, encompassing products such as bank accounts, term deposits and Cash Management Trusts.

The appeal is that they provide easy access to your money when you need it, and there’s no chance you could lose any capital – so they’re very secure.

However, whilst they do offer security, they usually provide very little income and no capital growth. So they can actually be quite risky over the long-term because inflation eats away at the value of your investment.

For most investors, these products are suitable for:

	Use as a transaction account
	Keeping cash on hand for short-term expenses and emergencies
	Short-term savings where you cannot afford any risk to your capital

Bonds
Bonds are a loan made to either a government or a corporate organisation – you “loan” your money for a set amount of time at a predetermined interest rate (either a fixed rate or at a fixed level above a variable rate) and receive a steady income stream through regular interest payments.

Bonds can be traded at prices that reflect prevailing interest rates. At the end of the term, you receive a payment equal to the bond’s face value.

Whilst bonds generally provide a more attractive return than cash, they do carry higher risk. The price of a bond rises as interest rates fall, and falls as interest rates rise. If interest rates rise sufficiently, it is possible to obtain a negative investment return.

Bonds are generally suited to investors who are seeking a higher return than is available from cash, but who are still seeking a low risk investment.

Shares
Shares (also known as “equities” or “stocks”) represent ownership in a company. When you buy a share, you become a part owner in the company and become entitled to share in its future value and profits.

Shares offer growth to investors in two key ways:

1.	As the overall value of the company increases, the value of your shares also increases.
2.	Companies can also elect to pay part of their profits to shareholders as an income payment, rather than reinvesting all profits back into the company. These income payments are known as “dividends”.

One of the major advantages of dividends is that they can be very tax effective. If you invest in an Australian company that has already paid tax on its profits, tax credits (known as franking credits) may be attached to the dividends the company pays to you. These franking credits can be used to offset tax payable by you, on other income. In addition, shares held for more than 12 months qualify for a 50% discount on any capital gains tax payable.

As shares are simply little parcels of companies, they have the potential to generate very high investment returns. However, they also have the potential to fall in value if the company’s performance falters.

Shares are generally best suited to investors who:

	Want to build up a solid nest egg for medium and long term savings goals
	Have a longer investment timeframe (5-7 years +)
	Are comfortable with some volatility in their investment value over the short-term, in exchange for higher returns over the long-term.

Property
Property is one asset class that most Australians are already very familiar with.

Property investment offers value to investors in two ways:

1.	Properties increase in capital value over time as house and land prices rise.
2.	You earn rental income from your tenants.

Like shares, property prices fluctuate and have periods of sustained high returns and sustained low returns, so property is generally only suitable as a long-term investment.

Property is generally best suited to investors who:

	Don’t require “emergency” access to their money
	Have a long-term investment timeframe (5-7 years +)
	Have the ability to meet mortgage repayments in the event that interest rates rise or when they have difficulty finding tenants

Managed funds
Managed funds work by pooling lots of individual investors’ money together and buying a large number of different assets (which may include shares, property, bonds and fixed interest).

Professional fund managers decide what percentage of the fund should be invested in each asset class, and also which countries, industries and companies have the best prospects for good returns.

Each investor then receives “units” in the fund, with each unit representing a mix of all the underlying assets.

There is a wide range of different types of managed funds available – some offer access to one or two asset classes, and others offer a mix of everything. Some managed funds also allow you to mix the actual fund managers that select and maintain the underlying investments.

The specific investment style and process of each fund is outlined in its Product Disclosure Statement (PDS).

Managed funds are an ideal option for people who are:

	New to investing
	Happy to outsource the selection of investments to professional manager/s
	Have a small initial amount to invest (with the option to make regular additional contributions)
	Seeking investment diversification to minimise risk.

Superannuation
Superannuation (super) is an investment vehicle set up specifically to hold your retirement savings.

Depending on your super fund, you can invest in a wide range of underlying assets, including shares, property, bonds, fixed interest and managed funds. In fact, you can invest in almost all the same assets you can access outside super, but with a range of attractive tax advantages.

The key difference is that super is restricted for use in retirement – so it’s not suitable for saving for pre-retirement goals.

Super is a good investment option for:

	Savings made solely for funding your retirement
	People seeking to reduce their tax

Finance

In finance, investment=cost of capital, like buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as gold, real estate, or collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value giving the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Personal finance

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Saving within personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is realized, unlike saving(s) where the more limited risk is cash devaluing due to inflation.

In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.

Economics

In economics, investment is the production per unit time of goods which are not consumed but are to be used for future production. Examples include tangibles (such as building a railroad or factory) and intangibles (such as a year of schooling or on-the-job training). In measures of national income and output, gross investment I is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of production after consumption, government spending, and exports are subtracted.

I is divided into non-residential investment (such as factories) and residential investment (new houses). Net investment deducts depreciation from gross investment. It is the value of the net increase in the capital stock per year.

Investment, as production over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock, that is, an accumulation measurable at a point in time (say December 31st).

Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than loaning them out for interest.

Business Management

The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: managers determine the investment value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business.

In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times the goal of the investment is for producing future cash flows, while at others it may be for purposes of gaining access to more assets by establishing control or influence over the operation of a second company (the investee).

(From Wikipedia, the free encyclopedia ; count.com.au)