Table of Contents
- Investment Definition
- What is an Investor?
- Explaining Investment Types
- Concept of Investment and Speculation
- Lesson Summary
Within an economy, there are many important factors that go into keeping the flow of money running as smoothly as possible. In order to be successful, governments and their citizens must both earn and spend currency to keep the economic cycle in motion. Investment is a basic principle of economics that has the purpose of helping to grow the economy and generate profit.
What is an investment? An investment is defined as putting money, time, or effort into something, be it a material or an intangible asset, with the hope that it will generate a profit or advantage in the future. The contribution may gain interest or appreciate over time. Essentially, when a person invests in something, they have the intention of being better off after a period of time as the asset accrues more value. Simply put, investing is spending money to make money.
There are usually more benefits than drawbacks with investment, meaning that most people find it worthwhile to take the risk of putting money or time into an asset. However, an asset being successful in gaining interest is never a guarantee. Investments could end up causing more loss than gain in some situations and should be considered carefully.
What is an example of investment? Investments occur many times throughout a person's life if they hope to become more well-off. For instance, a person may go to a bank and open a savings account or start a bond. When they invest money into this account, the asset will accrue interest over time and become more valuable. Likewise, when a person invests in the stock market, they put money into a share of a company (an asset) which they hope will produce a higher profit within a period of time. Of course, in both of these examples, the investor runs the risk of losing more than they put into the asset if the economy declines. However, economic decline is a less common event, and investing will often turn a profit.
Larger groups of people such as companies may also choose to make an investment. They could invest in a new plot of land and plan their budget to expand in the future. Further, a company could invest in healthcare for their workers to keep them safe in the event of an accident. This action builds trust with the employees, promotes a good company culture, and ensures that the workers can return to work quickly, meaning that the company will generate more revenue in the long term.
The opposite of investment is consumption. When someone practices consumption, they make a purchase that is intended for immediate use. They do not have an expectation that there will be added value to the asset gained over time. Consumption is a proponent of spending, while investment is setting money aside in order to gain more in the long term.
Consumption occurs across the market. A consumer is a person who spends money on items they want in the immediate present. For example, going to the grocery store and purchasing a loaf of bread is consumerism because there is no monetary or physical gain out of the purchase. Similarly, a parent buying a skateboard for their child's birthday would not make any person better off after a period of time financially.
The people who make investments are called investors. While it may be easy to think of the common person as the largest type of investor because they are the most visible in everyday life, there are many other individuals or groups which may invest in an asset. The following groups may choose to invest in resources, other businesses, or personal benefit:
In terms of spending and investing, the government is the group that partakes the most in both investing and consumption. It takes a large number of resources and strong relationships with trade partners to keep a nation moving progressively in a positive direction, so the government must put in time, money, or efforts to ensure the economic and political safety of the nation.
A government can invest in a wide range of sectors over the course of a fiscal year. In 2012, the federal government spent around 15% of its federal budget on investment. Some of the most invested sectors include education, infrastructure, national defense, public services (such as transportation), and the environment (restoration and power).
The four main types of investments are growth investments, defense investments, cash, and fixed interest. Each has a different purpose and unique benefits, and the type of investments can be mixed to best fit the needs or goals of the investors.
As many benefits as investing may present, explaining investment risks is necessary to decide which investment type may be the best or if an investment is viable at all. Among the largest risks to investment are:
The concepts of investment and speculation are very closely related but have different outcomes based on a few factors. While investment holds the hope or expectation that a monetary or intangible gain on an asset will be earned over time, speculation means to put finances into an asset that has a high probability of failure. Speculation is considered a large gamble for many investors, but it provides some of the larger benefits or returns when it turns out to be successful. Speculation is not exactly gambling, however, because investors have the knowledge to make an educated guess whether the investment is worthwhile.
Investment is one of the basic principles of growing the economy and generating revenue. To invest means to put time, effort, or money into an asset with the hope or expectation that it will provide a high return or benefits after a period of time. Investment is used as a function of economics by many parties known as investors, including the government, businesses, and common individuals. There are a few types of investments such as growth investments, defensive investments, cash investments, and fixed interest investments. Infrastructure, education, and scientific research are some of the largest government investments.
Consumption is a related concept to investment. It is the spending of money for the immediate use of an asset that holds no hope of higher returns in the long term. Consumers are an essential function of the economic cycle. Speculation is also related to investment and is investing in something that has little chance of being successful. However, when speculation is successful, the returns are large. Associated risks with an investment such as market risk, concentration risk, and inflation are worthwhile to be aware of when choosing to make an investment.
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To make an investment means to contribute time, effort, or money to something. There is an existing hope or expectation that over time, the asset being invested in will provide more benefits or have a higher value. Shares and bonds are a couple of examples of places where a person may choose to invest money and get a higher amount in return after a certain period of time.
Simply put, investing means putting a small amount of time or money into something and getting a larger amount back over time. Investments are a main component of economics that help generate profit and grow the economy.
There are four main types of investments which may be combined in any way to best fit the needs or goals of an investor:
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