The term investment refers to the process of acquiring an asset for the purpose of earning a financial return. Investment can be divided into two categories: trading and investing. Trading refers to buying and selling an asset in order to make a profit on it, while investing refers to buying an asset in order to hold it over time so that its value increases.
Definition
Investment is the money that is used in order to generate income in the future. It could be anything, from buying property to buying stocks or bonds. In order for this investment to be profitable, you must sell it for a higher price than you bought it for.
How to make money? When you invest money in something, you are expecting to make more money in the future. You might buy property or stocks with the hope that their value will increase over time.
Type of investment
An investment is a portion of money or capital that you invest or commit to an endeavor with the expectation of obtaining an additional income or profit. Investments can be made by individuals, businesses, and governments.
Risk and return
Risk and return are inversely related. The higher the risk, the greater the potential return you can expect to earn. Conversely, taking less risk results in a lower expected return.
A common way information about risk and return is presented is to illustrate these concepts using a graph called an investment curve or capital market line (CML). On this chart, you will see plotted two lines: one representing your expected rate of return based on your level of investment; and another showing how much risk you should be willing to take for any given level of potential reward.
The curve itself is actually a line that is plotted on a graph, but the concept remains the same. The CML can be used to help you determine how much risk you should take with any given level of potential return.
Rationale of investment
Investment is a long-term decision that requires analysis and planning. It’s also an activity that needs to be executed properly. In other words, investing is not something you can do randomly or impulsively.
The rationale of investment as defined by the dictionary is: “To invest (money) in stocks, bonds, property or other ventures; channel funds into such endeavors.” To put it simply, when people make investments they are putting their money into something with the expectation of getting a return on their investment over time—the more profitable or beneficial their investment becomes over time, the greater that return will be.
Liquidity
Liquidity is the ability to quickly convert an asset into cash without taking a large loss. Liquidity is important because it gives you more options when dealing with changing circumstances, such as unexpected expenses or new opportunities. For example, if you’re saving up for a house but need money in the meantime, having liquid assets allows you to withdraw them and spend them as you see fit without having to wait until they’ve been invested for several years.
Liquidity can be measured by how quickly and easily one can convert an asset into cash at that moment in time. Assets that are highly liquid include:
- Cash
- Mutual funds (cash equivalents)
- Stocks
Taxation
Taxes are a cost of doing business and are used to finance the operations of government. Taxes can be levied on personal income, corporate income, sales, imports and exports, estates and gifts. Taxes may also be included in the price of goods or services or added to the bill as a separate charge.
Taxes can be used to redistribute income or provide incentives for certain forms of behavior. For example, one might pay no taxes on investment income but face a high tax rate on wage earnings; that’s an incentive for someone who has invested in stocks to save money instead of spending it.
Investment is a process that involves buying an asset with the expectation of earning returns in the future. Investment is used to generate income and profits, which can be reinvested or used to buy goods and services.
