Before knowing the Importance of Investment. We must understand what investment actually is.
Investment can be defined as the utilization or deployment of funds in the expectation of future positive returns.
The concept of investment may be divided into the broader or customary sense and the narrower sense.
The broader or customary sense of the term investment is any asset or property right acquired or held for the purpose of preserving capital or earning an income.
In the narrower sense, the term ‘investment is used to suggest a commitment that is relatively free from risk of loss.
Again, investment is the purse of securities that, upon an appropriate analysis, offers safely of principal and satisfactory yield, commensurate with the risks assumed.
In other words, investment is defined as the commitment of funds in anticipation of receiving a larger future flow of funds.
Lastly, investment is defined as the postponement of the present consumption of an asset with the expectation of receiving future resources compensating the investor for the time the funds are committed, the expected rate of inflation, and the uncertainty of the future payments of both principal and returns thereon.
However, investments refer to investing money in certificates of deposits, government and corporate bonds, common stocks, or mutual funds.
Moreover, investments also include other paper assets like warrants, puts and calls, futures contracts, and convertible securities.
Deployment of funds in real assets like gold, silver, diamonds, arts, houses, buildings, real estate, and other tangible assets are also termed investments.
In finance technology, investments include both real assets and financial assets. Marketable securities are financial assets that are generally traded in the financial markets.
Key Note:
An investment involves putting capital to use today in order to increase its value over time.
Investment requires putting capital to work, in the form of time, money, effort, etc., in hopes of a greater payoff in the future than what was originally put in.
An investment can refer to any medium or mechanism used for generating future income, including bonds, stocks, real estate property, or alternative investments.
Investments usually do not come with guarantees of appreciation; it is possible to end up with less money than with what you started.
Investments can be diversified to reduce risk, though this may reduce the amount of earning potential.
Objectives of Investment
People invest to make money, increase money, monetary wealth both current and future and improve their welfare.
Investors expect to increase their future consumption possibilities by increasing their wealth rather than present consumption.
Some people save and invest during their working periods from which they can withdraw during their retirement periods. An investor has many alternatives. Savings that are kept idle do not earn anything.
Hence, savings are invested in assets depending on their risk and return characteristics.
The fundamental objectives of investments in financial assets arei. to hedge against inflationii. to maximize the return at a given or lower level of riskiii. to minimize risk at a given or higher level of return.
Importance of Investment
The reasons for investment are furnished below:
Current income:
People make investments to have a future generation of income in the form of interest from fixed-income securities and/or dividends from equities.
Capital gains:
People also make investments so that the funds will appreciate or grow in value. The objective of such investment is to increase money at a faster rate than inflation.
Investments with the motive of capital gains should have risk exposure to get the desired returns. Risk can affect returns either positively or negatively.
Importance of Investment
Capital preservation:
People make investments in order to preserve capital. These types Of investments are called conservative investments. Investors invest their funds in assets with the assurance that the funds will be available, with no risk of loss in purchasing power at a future point in time.
As the investors desire the real value of the funds invested, the nominal value of the investment should increase at a pace consistent with inflation trends. Therefore, the returns on such investments should approximate the risk-free nominal interest rate for a nontaxable investment.
Capital distribution:
Capital distribution refers to the distribution of retained earnings in the form of stock dividends, and bonus shares to common stockholders which increase the equity.
