Good investments
Investment aims at multiplication of money at higher or lower rates depending upon whether it is a long term or short term investment and whether it is risky or risk free investment. Investment activity therefore involves creation of assets or exchange of assets with profit motive.
II. Nature of investment
Nature of any product or instrument can be made out by describing its characteristics. Thus the nature of investment can be better explained with the help of its characteristics. The main characteristic of investment is waiting for a reward. The second characteristic is commitment of resources either for a long term or a short term commitment by putting off the present consumption. The third quality is earning additional income or growth in value. The fourth characteristic of investment is risk either of high or low degree. The fifth one is a calculated speculation or guess.
Investment in safe or risky assets with a view to earning some gain over a given period of time is called as financial investment and such assets are called financial assets. The gain may take the form of interest, dividends, rent, premiums, pension benefits or the appreciation of the value of the principal capital.
The financial sense of investment differs from its economic sense. If investment results in the net additions to the economys capital stock which consists of goods and services that are used in the production of other goods and services, then it is termed as physical investment and assets so produced are called physical assets. This is the economic sense of investment which implies information of new and productive capital in the form of new buildings, new plant and equipment, inventories, human capital.
Investment vs speculation
Though there is an element of speculation in the investment, investment cannot be equated with speculation since speculation is considered to be just a guess and there is no scientific basis for the hunch.
The points of difference are:
a. Degree of risk Risk in the field of investment management, refers to possibility of incidence of financial loss. The degree of risk varies depending on the type of investment asset chosen. Normally risk involved in investments is either loss of profit or lower profit than expected. It is also believed that risk in the case of investment is limited and is confined to those avenues where the principal is safe. Speculation as already mentioned as a baseless guess and may result in a very high profit or high loss. The risk in the case of speculation is therefore considered as very high. The stockholders normally display two separate lists, one for investors and the other for speculators. Risk, therefore is present both in investment and speculation and the only difference is risk in them differs in degrees. Certain risks like the purchasing power risk and the money rate risk are non-manageable. Purchasing power risk is the fall in the real value of the interest and principal and the money rate risk is the fall in market value when interest rate rises.
b. Capital gains The motive behind investment is achievement of capital appreciation along with or without a regular return, whereas the objective behind speculation is to achieve profits through price changes. Investment involves proper investigation, analysis, review and forecast of a stable return over a period of time. Whereas buying securities when they are available at low price and selling them at high price making capital gain is associated with speculation.
c. Time period If a person spends monetary resources for acquiring a particular asset and does not expect an immediate return on it and waits for long term benefit, it is termed as investment. On the other hand if a person expects fast buck on his assets and disposes of the asset in the short run, then it is called speculation. Though some differences are explained above between investment and speculation, drawing a clear cut line of demarcation between is not possible since there is only a very fine line of division between them. They both are not watertight compartments by which they are distinguished separately as investment and speculation. An investor is normally found to evaluate the worth of a security whereas the speculator is found to be watching market fluctuations in the prices of assets he purchased. In fact, investment is nothing but a well planned and successful speculation. It therefore, goes without saying that investment and speculation involve planning of existing risks.
Investment vs gambling
Investment entail an outlay of funds after carefully evaluating the various criteria like safety of principal, moderate and continuous return and long term commitment. Gambling on the other hand implicates high risk with an expectation of high returns. Uncertainty, thrill, hunch, excitement, bumper gain or heavy losses etc. are the characteristics of gambling. Horse races, games of cards, lottery etc., are the examples of gambling. Gambling relies on tips, rumours and hunches and it is therefore considered as unplanned, un-scientific and uncalculated risk.
Driviing forces of investment
Though there are many factors that influence the decision of investing in assets, there are some main driving forces that cause investment in any society like:
a. retirement plan
b. avoidance of taxation
c. tempting high rates of interest
d. high inflation and resultant expectation of increase in the monetary return
e. Hike in incomes
f. Availability of a large number of investment avenues
g. Legal safeguards
h. Existence of financial institutions to encourage savings etc.
III. Characteristics of good investment
An investment programme should consist of safety of principal, liquidity, income stability, adequate income, purchasing power stability, appreciation, legality and transferability.
Investment process
An investment process involves four steps. First step is setting an investment policy, second step is to analyze the investment, third step is to evaluate the existing investment avenues keeping in view various objectives of the investor and finally to construct a well balanced portfolio.
IV. Classification of investments
Different methods of classification of the investment avenues are available. Some of the methods with examples are given hereunder:
a. Physical investments They are tangible items like motorcars, aeroplanes, ships, buildings, plant and equipment, machinery etc. Another sub-classification in this is of physical assets which are useful for further production and creation of income, like machinery equipment etc. mentioned above and those which are not useful for further production like gold and silver ornaments.
b. Financial investments Financial assets are those which are used for consumption or for production of goods and services or for further creation of assets.
c. Marketable and non marketable investments Examples of marketable investments are shares, bonds and other instruments issued by government or companies which are listed in the stock exchanges are easily marketable and can be converted into cash in a short time. Non-marketable investments are bank deposits, provident and pension funds. Insurance certificates, post office deposits, National savings certificates, company deposits, private limited companies shares etc.
d. Transferable non-transferable investments Instruments like shares, bonds can be transferred in the name of others or can be sold or exchanged for cash or kind whereas some instruments like insurance certificates, post office deposits, and national savings certificates cannot be transferred.
V. Factors determining the investment
The amount made available for investment in a particular company, however, depends on many factors, some of which are:
Rate of growth of the economy.
Total money supply.
Savings potential marginal.
Propensity to save.
Performance of companies.
Facilities available for liquidation.
Individual preferences of investors etc.
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