What is Investment: Objectives, Types [2022]

What is Investment: Objectives, Types [2022]

Investments are the placement of capital for the purpose of making a profit. It is not necessarily money that is invested. Capital can be in the form of property rights, technology, anything that has a price.

The broadest definition was given by C. R. McConnell and S. L. Brew: investment is the cost of making and accumulating means of production, as well as increasing inventories.

Investment Objectives

Investment, like any investment of money, is carried out for profit. But not always.

For example, investments in medicine can be made to improve the quality of health care. In this case, the goal is to achieve a positive result.

There are many tools that allow increasing the capital. A loan can be classified as such, but it is given with a guarantee of return of fixed assets and accrued interest, without interfering in the borrower's activities. The lender's profit is fixed in the contract regardless of the result. Note!

The classical investor, unlike the lender, assumes the risks, and the income depends on the success of the project. In case of failure, one can lose not only profits, but also invested funds, whereas proper investment sometimes brings fabulous fortunes.

Example. The McDonald's restaurant chain. When entrepreneur Ray Cork visited a McDonald's restaurant, he was struck by the speed of customer service. Cork was on the verge of bankruptcy at the time and did not have much money, but he invested what was left in the restaurant. This was not enough to meet the growing demand. As a result, a new franchise company emerged.

Those wishing to make money from quick service were invited to invest at their own risk in spreading the technology developed by McDonald's customer service and food preparation, applying it in their own or leased premises under the same brand.

The result is that McDonald's operates in more than 150 countries, has a multi-billion dollar turnover and has contributed to the term fast food being used around the world. How investments differ from other investments

In order to determine exactly what is an investment and what is not, it is necessary to identify the characteristics of this type of activity. These include:

  1. The use of assets to accomplish a specific, intended purpose;
  2. The ability to generate income, sometimes through indirect mechanisms;
  3. The presence of a specified period after which the investor has the right to withdraw funds from the project;
  4. The ability to use different types of resources.

Example. Investments in education can have different purposes. If an organization rents a building to an institute at a fixed rate, it simply profits from the use of its real estate without interfering in the work of the institution. It cares about the activities of the institute only from one point of view: the building must be maintained properly, without violating the law.

Such an organization cannot be a full-fledged investor, it is more just a landlord. Broadly speaking, albeit with reservations, we can consider the building an asset invested in education.

Another legal entity pays for the lease of that building, helps build a staff of competent teachers, and invests in improving the level of education. This, without any reservations, is a full-fledged investment activity.

The sign of an investment is, as indicated, the presence of a profit or positive effect. Even if the institute is successful, there may be neither, especially when the demand for paid education is low.

But graduates of the institute may end up on the investor's staff, and through their acquired professionalism, improve economic performance. Profit, in the end, will be obtained, but in an indirect way. In addition, there is an improvement in the quality of education - there is the beneficial effect.

Investment types

There are many ways to carry out such activities. Classification is based on the type of assets, the period of investment, and other characteristics. Investments are distinguished as follows.

Depending on the object of investment:

  • Real - acquisition of fixed assets, land, real estate, investments in the development of brands, etc.
  • Financial. Includes the purchase of shares, bonds, other securities. As well as the provision of leasing services, loans, other forms of financial transactions.
  • Speculative. Involves making profit from an expected increase in the price of an investment.
  • Non-financial, venture capital. In this case, funds are invested in inventions, patents, trademarks, which have monetary value and have a positive influence on the efficiency of the company.
  • Intellectual. These are investments in education, training, and other products of intellectual activity.

Objects of investment

As they used to say in the era of scarcity, the main problem of the Soviet man - the problem of choice.

People bought what was available. The emergence of a wide range of products initially confused the buyer. Nowadays the investment situation is different. There are a lot of items, technologies, and activities that promise profits if invested wisely.

And both domestically and abroad. But the choice is difficult, because a positive outcome depends on many circumstances, often not of an economic nature. An investor should start with the correct definition of the object of investment.

This is understood as anything that can bring dividends for a certain period of time. The object of investment should be an asset, it should have a price, have the ability to yield a profit. The subject of investment should not be confused with the object.

The subject is the investor, that is, the one who invests assets (money, securities, other). An object is something in which money (other means) is invested, and is itself an asset. There are two types of assets:

  1. Highly liquid;
  2. Low liquid.

Liquidity is the time and effort it takes to sell an asset at market price. There is a pattern: liquidity is directly proportional to the speed of price change. This pattern is especially pronounced on the securities market. The faster they go up in price, the higher the demand.

The shares of a successfully developing company always rise in price and are in demand. And vice versa, the rapidly declining shares are interesting because they offer an opportunity to buy a company in crisis for a small sum and to obtain profit from growing securities value of the reanimated asset.

The most liquid object is a convertible currency, which is easy to sell. Low-liquid assets include everything that is not in high demand at the moment or requires a long time to implement. For example, land plots without running communications, unfinished real estate.

The next step is for investor to make an assessment of the investment object. This is no less responsible step that requires professionalism. Unsuccessful investments are most often caused by wrongly determined price of the asset or exaggerated growth forecast.

For example the price of the American dollar at the currency exchange is known every day and every hour, professional knowledge is not necessary. It is enough to read the quotes.

Another example. If the entrepreneur decided to reanimate an abandoned mini-mill, the help of experts specializing in the valuation of objects will definitely be required. It is necessary to take into account many factors, such as the degree of depreciation of the structure and equipment, the state of communications, proximity to consumers, and others. Terms of investment

According to the duration, investments are divided into 3 types:

  1. Short-term. Such investments are considered to be for up to one year. Basically, it is speculation on the currency or stock market, bank deposits. It must be noted that there is no unequivocal opinion on whether speculation is an investment or not. Investors pursue the goal of investing money and systematically receiving profits. Speculation involves investing money to cure a one-time profit from the resale of a single asset. A speculator's strategy is to buy cheaper and sell higher. The faster, the better.
  2. Medium-term. The duration of these is 1 - 5 years. The most common type. Among its advantages are liquidity, stability. Within several years, an asset becomes adjusted to market fluctuations, better adapted to overcome crisis periods. This is the golden mean, when risks are not excessive and profitability is sufficient. In most cases, medium-term investments are applied to financial assets.
  3. Long-term. They are applied for the term over 5 years. Such investments are made mainly in commercial real estate. Allow to earn the impressive sum, as require the investment of large capital. It is a conservative type of investments which does not promise fast payback, but it is the most reliable.

Profitability and risks of investment

To the great regret of investors, these concepts go side by side. The higher the yield, the higher the risk. It is an axiom, which acts as inevitably as the law of universal gravitation.

Beginner investors make the same mistake: the analysis of an investment object begins with the calculation of returns, not with the determination of the degree of risk. This is absolutely the wrong approach, similar to a game of roulette. 

How to increase profitability and reduce risks

Every investor is faced with the task of ensuring that he gets the maximum profit, or achieve the desired result, without using excessively risky methods. There are several ways to reduce risks.

  • Insurance. An insurance company participates in investment project. It guarantees a refund if an insured event occurs. But if it is not, the insurance premium, formed at the cost of premiums, remains with the insurer.
  • Diversification. Concludes in buying several types of assets. Each of them has its own profitability and risk. If profit on one of them falls, the situation is leveled out by the others. In total, there is still income. The disadvantage of this method is its inability to withstand a systemic crisis affecting all sectors of the economy.
  • Hedging. It is the purchase of the right to sell assets at a fixed price, regardless of the conjuncture.
    In addition to safety, the investor is concerned about the profitability of his investments. Income depends on many interrelated factors, but there are general rules developed throughout the centuries which, if followed, can help to increase profit from investments.

Rules to keep profitability at a good level:

  1. Constant monitoring of the market in order to reinvest the part of assets that does not bring the expected profit.
  2. Modernization of production and optimization of management in order to increase productivity, extend the range and improve quality.
  3. An effective advertising campaign that increases the investment attractiveness of the enterprise.
  4. By rapidly diversifying its activities to respond to changing economic conditions.

Keeping to these rules, it is possible to keep profitability at an acceptable level. It is not necessary to overestimate possibilities of object. Excessive expectations can lead to senseless spending of resources in an unrealistic desire to achieve high returns.

What is an investment portfolio?

This term means a set of assets in which funds are invested. When making a portfolio, investments are made in shares in deposits, securities, real estate, and other objects, which is called a portfolio investment. Investments in one type of assets are not considered as such.

Example. A person inherited 5 million rubles, for which he partially bought US dollars, Gazprom shares, and for what was left he bought a carwash in front of his house. These are diversified portfolio investments.

A properly constructed portfolio is not a collection of objects and financial instruments. It is, first and foremost, a reasonable balance between returns and risks.

Advantages and disadvantages of investing

Potential investors often hesitate to take advantage of the opportunity because they do not quite correctly imagine the peculiarities of this activity. 

Advantages:

  • The possibility of obtaining passive income without much work.
  • The use of different sources of income, which increases the efficiency and safety of investment.
    absence of limits on the maximum income, which depends primarily on the commitment of the investor;
  • independence, the ability to continuously improve the level of economic education and financial literacy.

Disadvantages:

  • The need for initial capital, which may take years to acquire.
  • High requirements to the professional level of the investor;
  • Lack of guarantees, the need to constantly adapt to the changing market conditions.

People who are used to receiving a guaranteed income, such as a salary, have the hardest time switching to investing. The vast majority of citizens seek to preserve savings rather than to multiply them, and invest in currency. What scares away is the fear of losing everything, which happens to investors in our country with enviable regularity. 

Investing is an attractive enough tool to increase your own wealth. Even if you lack knowledge and skills, common sense, a sense of proportion and determination will help to overcome all obstacles on the way. And knowledge, like experience, comes with time.