The Concept of Investment

Devon Denomme, Shawn Grimsley
  • Author
    Devon Denomme

    Devon has tutored for almost two years. They have a Bachelor's in Air Traffic Management from Embry-Riddle Aeronautical University and minored in Aviation Safety and Homeland Security. They also are AT-CTI certified.

  • Instructor
    Shawn Grimsley

    Shawn has a masters of public administration, JD, and a BA in political science.

Read the investment definition. Understand what an investor is and explore an example of an investment. Learn about government investment and understand the concept of investment. Updated: 09/05/2021

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Investment Definition

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?

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.

Investments take place commonly in business. The stock market is one of the largest places to invest in and gain large returns over a period of time.

investment definition

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.

What is the Difference Between Investment and Consumption?

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 is related to investment. This opposite term means spending money without the hope of gaining anything in the long term. Consumption is just as important to the economy as investing.

concept of investment

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.

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What is an Investor?

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:

  • Governments make decisions through fiscal policy, which is essentially the taxing and spending budget. Governments invest in improving infrastructure (roads, bridges, buildings), education, scientific and technological research, and subsidies that may aid other industries within the nation.
  • Businesses aim to increase their overall revenue through investment. Many businesses buy into land for expansion, natural resources, labor, and healthcare to ensure worker safety and physical items such as the latest technologies and machinery.
  • Servicemen and the military invest in the latest technologies and research to keep the nation safe. The advancement of defense mechanisms is critical to national security.
  • Individuals of different statures invest in their own futures as well as other businesses. Individuals may invest in their retirement funds and short-term financial goals to keep out of debt or have a cushion when the economy declines. Stocks, bonds, and real estate are other common individual investments. Personal investors and angel investors fund small startup companies to improve the wealth of a local economy.

The Government as an Investor

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.

The government is one of the largest investors. Over time, they have put money into developing and growing the technologies behind clean and renewable energy, with large returns.

what is an example of investment

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).

Explaining Investment Types

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.

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Frequently Asked Questions

Which is the best definition of investment?

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.

What is investment in simple term?

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.

What are the 4 types of investments?

There are four main types of investments which may be combined in any way to best fit the needs or goals of an investor:

  • Growth investments
  • Defensive investments
  • Cash investments
  • Fixed interest investments

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