Investment

Definition

Investment refers to the purchase or allocation of capital into various financial products or physical assets with the goal of generating future income, capital gains, or both. The primary motive behind investments is wealth accumulation over a period. Investments have varying lengths and degrees of risk associated with them and are usually planned for a long-term horizon.

Key Characteristics of Investment

1. Future Income or Gain: Investments aim at providing future benefits, either in the form of periodic income (like dividends or rent) or capital appreciation.
2. Risk and Return: The return on investments is generally linked with the risk associated with them. Higher risks often have the potential for higher returns.
3. Long-Term Horizon: Unlike speculation which often aims for quick gains, investments are made with a longer-term perspective.

Examples

1. Stocks: Purchasing shares in a company with the expectation of earning dividends and capital appreciation.
2. Bonds: Lending money to a government or corporation in exchange for periodic interest payments and the return of principal at maturity.
3. Mutual Funds: Investing in a diversified portfolio managed by a professional investment manager.
4. Real Property: Buying land or buildings with the intention of earning rental income and anticipating property value appreciation.
5. Collectibles: Acquiring items of value such as art, antiques, and rare coins with the hope that their value will increase over time.
6. Annuities: Investing in financial products that offer a series of payments over time.

Frequently Asked Questions (FAQs)

1. What is the difference between investment and speculation?

   • Investment involves long-term planning with a focus on consistent returns and lower risk, while speculation typically involves higher risk, short-term bets aiming for quick profits.

2. Are there tax implications for investments?

   • Yes, investments can have significant tax implications including capital gains taxes, dividend taxes, and interest income taxes that vary depending on the jurisdiction.

3. How do you determine a good investment?

   • Determining a good investment involves assessing factors such as risk tolerance, investment horizon, financial goals, market conditions, and the potential for return.

4. What is the safest type of investment?

   • Generally, government bonds are considered very safe due to their fixed returns and government backing. However, their returns are typically lower than riskier investments.

5. Can real estate be considered a good investment?

   • Yes, real estate can be a good investment as it historically appreciates in value and can provide a steady income in the form of rent, though it involves significant initial capital and is less liquid.

Related Terms

• Income: The money received regularly from investments in the form of dividends, interest, or rent.
• Capital Gain: The profit from the sale of an investment, calculated as the difference between the selling price and the purchase price.
• Speculation: Act of trading in an asset or conducting a financial transaction that has a significant risk of losing value but also holds the expectation of a significant gain.

Online References

• Investopedia - Investment
• Wikipedia - Investment

Suggested Books for Further Studies

1. The Intelligent Investor by Benjamin Graham
2. A Random Walk Down Wall Street by Burton G. Malkiel
3. Common Stocks and Uncommon Profits by Philip Fisher
4. One Up On Wall Street by Peter Lynch
5. The Little Book of Common Sense Investing by John C. Bogle

Fundamentals of Investment: Finance Basics Quiz

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