Overview of Investing
and 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.
Returns on investments
will follow the risk-return spectrum.
Business Management
The investment decision (also known as capital
budgeting) is one of the fundamental decisions of
business management: managers determine the assets that
the business enterprise obtains. These assets may be
physical (such as buildings or machinery), intangible
(such as patents, software, goodwill), or financial (see
below). The manager must assess whether the net present
value of the investment to the enterprise is positive;
the net present value is calculated using the
enterprise's marginal cost of capital.
Finance
In finance, investment is 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.
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.
Real estate
In real estate, investment is money used to purchase
property for the sole purpose of holding or leasing for
income and where there is an element of capital risk.
Unlike other economic or financial investment, real
estate is purchased. The seller is also called a Vendor
and normally the purchaser is called a Buyer.
Residential Real Estate
The most common form of real estate investment as it
includes the property purchased as peoples houses. In
many cases the Buyer does not have the full purchase
price for a property and must engage a lender such as a
Bank, Finance company or Private Lender. Different
countries have their individual normal lending levels,
but usually they will fall into the range of 70-90% of
the purchase price. Against other types of real estate,
residential real estate is the least risky.
Commercial Real Estate
Commercial real estate is the owning of a small building
or large warehouse a company rents from so that it can
conduct its business. Due to the higher risk of
Commercial real estate, lending rates of banks and other
lenders are lower and often fall in the range of 50-70%.
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