Understanding Investment

Determinants of Investment

Determinants of Investment

Investment refers to an increase in capital assets. But there are some key determinants of Investment. Investment has wide scope in the capital market and other sectors of the country.

Determinants of Investment

The functions of the investors are influenced positively or negatively by the following factors:-

General price level:

It is the first factor influencing the functions of an investor because the general price level always shows a rising tendency due to the inflation prevailing in the economy.

The rising tendency of the general price level creates elements of uncertainty and confusion in the thinking of investors which causes fear of the safety of the principal.

Business conditions and profits:

Business conditions and profits are the second important factor influencing the functions of an investor.

Because the investors invest their funds in shares, stocks, bonds, debentures, and the like after analyzing the vendor company’s growth prospect of the business in terms of profits, earning capacity, and liquidity.

Determinants of Investment


The third factor influencing the functions of an investor is the payment of dividends declared by the company to its shareholders.

The stable rate of dividends always attracts investors to invest in the shares and stocks of the vendor company and any fluctuation in profit discourages investors to invest their funds in the form of shares, and stocks of the same.

Interest rate:

The interest rate is the fourth and one of he most important factors influencing the investors to invest in debentures and bonds of the vendor company.

The investors will invest money in the form of bonds and debentures of the vendor company which pays high fate of interest.

The investors feel encouraged to invest their investible ny dir the ya test interest commensurate with the rate of inflation prevailing in the economy.

Security prices:

The fifth and last factor influencing the functions of an investor is the security price. The security prices may be labeled by the two systems viz., stock price cycles system and stock price swings system.

The security price quoted under the stock price cycles system is a consistent and somewhat revolving system.

But the security price is quoted inconsistently and fluctuates under the stock price swing system. The investors feel encouraged to invest their funds under the stock price cycles system rather than stock price swing system.

In fine, these are the factors influencing the functions of an prospective investor. A prudent investor must consider the above-mentioned factors and analyze them very carefully while making an investment decision.

Investment Media

In financial markets, an investor has various alternatives to invest. Some investment media are simple and direct; some present complex problems of analysis and investigation.

Some are familiar, some are relatively strange. Some are more appropriate for one type of investor than for another.

This section will analyze various forms in which investment media are classified.

 Insurance and retirement fund:

  • Life insurance
  • Fixed and variable annuities
  • Government retirement fund for social security
  • Private pension fund

Deposit fund:

  • Savings and time deposit with commercial banks
  • Deposits in mutual savings banks 
  • Deposits savings and loan associations 
  • Shares in the credit union 
  • Eurodollar certificates of deposit
  • Eurodollar deposit

 Short-term investment:

  • Short-term government securities
  • Commercial papers
  • Banker’s acceptance
  • Certificates of deposit
  • Negotiable bank certificates of deposit 
  • Repurchase agreement

 Long-term securities: 

  • Bonds, notes, and stocks of business or commercial enterprises 
  • Bonds, and shares of investment companies
  • Bonds, and shares of commercial banks
  • Shares in savings and loan associations
  • Loans and shares in insurance companies
  • Government bonds and other long-term obligations
  • Local government and municipal bonds 
  • Securities of foreign governments

 Real estate and other immovable properties:

  • Investment for occupancy or residential purpose
  • Investment for income and/or commercial purpose
  • Bonds, and shares in real estate companies and syndicates 
  • Real estate mortgages 
  • Mortgage-backed securities 
  • Shares in real estate investment trusts

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