The term "investment"
is used differently in economics and in finance. Economists refer
to a real investment (such as a machine or a house), while
financial economists refer to a financial asset, such as money
that is put into a bank or the market, which may then be used to
buy a real asset.
The investment
decision (also known as capital budgeting) is one of the
fundamental decisions of business management: managers determine
the assets that the business enterprise obtains. These assets may
be physical (such as buildings or machinery), intangible (such as
patents, software, goodwill), or financial (see below). The
manager must assess whether the net present value of the
investment to the enterprise is positive; the net present value is
calculated using the enterprise's marginal cost of capital.
A business might
invest with the goal of making profit. These are marketable
securities or passive investment. It might also invest with the
goal of controlling or influencing the operation of the second
company, the investee. These are called intercorporate, long-term
and strategic investments. Hence, a company can have none, some or
total control over the investee's strategic, operating, investing
and financing decisions. One can control a company by owning over
50% ownership, or have the ability to elect a majority of the
Board of Directors.
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Finance
In finance, investment=cost of capital,
like buying securities or other monetary or paper (financial) assets in
the money markets or capital markets, or in fairly liquid real assets,
such as gold, real estate, or collectibles. Valuation is the method for
assessing whether a potential investment is worth its price. Returns on
investments will follow the risk-return spectrum.
Types of financial investments include
shares, other equity investment, and bonds (including bonds denominated in
foreign currencies). These financial assets are then expected to provide
income or positive future cash flows, and may increase or decrease in
value giving the investor capital gains or losses.
Trades in contingent claims or
derivative securities do not necessarily have future positive expected
cash flows, and so are not considered assets, or strictly speaking,
securities or investments. Nevertheless, since their cash flows are
closely related to (or derived from) those of specific securities, they
are often studied as or treated as investments.
Investments are often made indirectly
through intermediaries, such as banks, mutual funds, pension funds,
insurance companies, collective investment schemes, and investment clubs.
Though their legal and procedural details differ, an intermediary
generally makes an investment using money from many individuals, each of
whom receives a claim on the intermediary.
Personal finance
Within personal finance, money used to
purchase shares, put in a collective investment scheme or used to buy any
asset where there is an element of capital risk is deemed an investment.
Saving within personal finance refers to money put aside, normally on a
regular basis. This distinction is important, as investment risk can cause
a capital loss when an investment is realized, unlike saving(s) where the
more limited risk is cash devaluing due to inflation.
In many instances the terms saving
and investment are used interchangeably, which confuses this
distinction. For example many deposit accounts are labeled as
investment accounts by banks for marketing purposes. Whether an asset
is a saving(s) or an investment depends on where the money is invested: if
it is cash then it is savings, if its value can fluctuate then it is
investment. |
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