The income receives by a person may be used to purchasing goods and services that he currently requires or it may be saved for purchasing goods and services that he may require in the future. In other words, income can be spent for consumption or saved for the future consumption. Savings are generated when a person or an organization abstains from present consumption for a future use. Investment is an activity that is engaged in by people who have savings, i.e. investment is made from savings. But all savers are not investors. Investment is an activity which is different from saving. Let us see what is meant by investment.
If you have ever deposited money in a savings account, you already have at least one investment to your name. An investment is simply any alternative into which funds can be placed with the expectations that they will generate positive income and/or that their value will be preserved or increased. If one person has advanced some money to another, he may consider his loan as an investment. He expects to get back the money along with interest at a future data. A person may purchase an insurance plan for the various benefits it promises in future.
In all these case it can be seen that investment involves employment of funds with the aim of achieving additional growth in values. The essential quality of an investment involves waiting for a reward.
Forms of investment
Assets can be categories into two forms financial assets and real assets. Accordingly, there are two forms of investment
i) Financial investment
ii) Real investment
Financial investment
Investment in financial assets like common stocks, bond etc is called financial investment. A financial asset represents a financial claim. It is an asset that is usually documented by some forms of legal representation. Although tangible certificates of ownership typically represent financial assets, the financial asset itself is intangible. They are also called securities. Financial assets themselves do not directly posses productive capacity. Financial assets can be viewed as claims to the income generated by real assets. In this context, the value of financial assets is derived from the value of the underlying real assets. Financial assets are also called ‘paper assets’.
The entity that agrees to make future cash payments is called the issuer of the financial asset; the owner of the financial asset is referred to as the investor.
Real investment
A real asset represents an actual tangible asset that may be seen, felt, held or collected e.g. real estate, gold etc. investment in such tangible assets is called real investment. Real assets have productive capacity. The capital formation is the direct outcome of this productive investment.
Although the importance of real assets can’t be overlooked, I use the term investment in this book strictly with reference to financial investment.
However, it is noted that the real investment and financial investment are complimentary to each other. For instance, a company issues shares of common stock to finance the plant and machinery. Here, the purchase of plant and machinery is area investment by the firm and on the other hand, investment in common stock by the investor is a financial investment. Because of the divisibility, marketability and availability of information, financial investment is getting much more popular nowadays.
If you have ever deposited money in a savings account, you already have at least one investment to your name. An investment is simply any alternative into which funds can be placed with the expectations that they will generate positive income and/or that their value will be preserved or increased. If one person has advanced some money to another, he may consider his loan as an investment. He expects to get back the money along with interest at a future data. A person may purchase an insurance plan for the various benefits it promises in future.
In all these case it can be seen that investment involves employment of funds with the aim of achieving additional growth in values. The essential quality of an investment involves waiting for a reward.
Forms of investment
Assets can be categories into two forms financial assets and real assets. Accordingly, there are two forms of investment
i) Financial investment
ii) Real investment
Financial investment
Investment in financial assets like common stocks, bond etc is called financial investment. A financial asset represents a financial claim. It is an asset that is usually documented by some forms of legal representation. Although tangible certificates of ownership typically represent financial assets, the financial asset itself is intangible. They are also called securities. Financial assets themselves do not directly posses productive capacity. Financial assets can be viewed as claims to the income generated by real assets. In this context, the value of financial assets is derived from the value of the underlying real assets. Financial assets are also called ‘paper assets’.
The entity that agrees to make future cash payments is called the issuer of the financial asset; the owner of the financial asset is referred to as the investor.
Real investment
A real asset represents an actual tangible asset that may be seen, felt, held or collected e.g. real estate, gold etc. investment in such tangible assets is called real investment. Real assets have productive capacity. The capital formation is the direct outcome of this productive investment.
Although the importance of real assets can’t be overlooked, I use the term investment in this book strictly with reference to financial investment.
However, it is noted that the real investment and financial investment are complimentary to each other. For instance, a company issues shares of common stock to finance the plant and machinery. Here, the purchase of plant and machinery is area investment by the firm and on the other hand, investment in common stock by the investor is a financial investment. Because of the divisibility, marketability and availability of information, financial investment is getting much more popular nowadays.
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