What is investment?
The word investment refers to either the application of money to make more money, the purchase of goods that are not consumed now but are used in the future to make money (create wealth), or a monetary asset that will rise in value and be sold at a higher price or provide income in the future.
According to the Financial Times, there are two main types of investments:
– Direct Investment: putting your money into specific fixed assets such as buildings, factories, property, etc.
– Indirect Investment: purchasing securities or other assets that are bought and sold on financial markets.
American business magnate, investor and philanthropist Warren Buffett said “Investing is putting out money to be sure of getting more money back later at an appropriate rate.”
In economics, investment refers to the usage of resources in order to raise income or output in the future. If you deposit money in an interest-bearing account in a bank, or purchase machinery in anticipation of earning income from its production, you are investing.
Difference between asset and investment
If you buy a house and live in it, it is an asset. Assets can go up and down in value. Even if you do not live in it, and leave it empty, it is an asset.
However, if you decide to rent out your house, i.e. use it to generate income, that asset becomes an investment. An investment is something that generates further income.
Investment may also involve giving up time for future benefit. For example, somebody who goes to university is investing his or her time in order to gain a qualification and have a career in the future.
Many individuals get together and create investment clubs, which pool their resources and knowledge together with the aim of achieving more successful investment outcomes.
“The act of putting money, effort, time, etc. into something to make a profit or get an advantage, or the money, effort, time, etc. used to do this.”
In military terminology, investment can mean the process of surrounding a town or fort with armed forces to prevent anything or anybody from entering or escaping (a military blockade). The aim is to cut communications with the outside world, and prevent reinforcements and supplies from entering.
The English word ‘investment’ is ‘investissement’ in French, Spanish – inversión, Portuguese – investimento, Italian – investimento, German – Investition, Russian – инвестиции, Japanese – 投資, and Chinese – 投资.
– British economist, John Maynard Keynes (1883-1946), said:
“The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelope our future.”
– Apple Inc. co-founder, Steve Jobs (1955-2011), said:
“The over-all point is that new technology will not necessarily replace old technology, but it will date it. By definition. Eventually, it will replace it. But it’s like people who had black-and-white TVs when color came out. They eventually decided whether or not the new technology was worth the investment.”
– American engineer and former astronaut, Buzz Aldrin, the second man to walk on the moon, said:
“There’s a need for accepting responsibility – for a person’s life and making choices that are not just ones for immediate short-term comfort. You need to make an investment, and the investment is in health and education.”
– Mexican business maganate Carlos Slim, the world’s richest person from 2011-2013, said:
“Anyone who is not investing now is missing a tremendous opportunity.”
– America’s 35th President, John F. Kennedy (1917-1963), said:
“The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital… the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”
– Hungarian-born American business magnate, George Soros, said:
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”
– One of the Founding Fathers of the United States, Benjamin Franklin (1706-1790), said:
“An investment in knowledge pays the best interest.”
– American business magnate, Bill Gates, co-founder of Microsoft Corporation, said:
“I believe the returns on investment in the poor are just as exciting as successes achieved in the business arena, and they are even more meaningful!”
A person who specializes in analyzing investments is called an investment analyst.
Q Theory is an investment theory which gives you a ratio of a company’s market value to the net replacement cost of its assets. When q is worth more than 1, it is advisable to invest in that company, when q is worth less than 1, it is better to sell.
Video – What is an investment?
This video explains what an investment is, from an economist’s point of view.