The word investment has a wide connotation. You might come across the term investment in your everyday life. The word has a very straightforward yet interesting meaning. Let us explore the term investment.
Investment is spending on something, buying, or acquiring it to make money out of it. It is the addition of income-generating assets. These assets are those that have a scope for further appreciation. Their value increases over time and becomes an income source for the investor.
Usually, people do not invest in assets with the motive of consuming them. Instead, they aim at creating or adding to their wealth with such assets. The notion behind investing in any asset is that it will likely reap you higher than what you spend on buying it.
The working of investment
If we pick any real-world instance, the goal of some effort, energy, and money on something is to get higher returns. For instance, you might pursue a doctorate to add to your knowledge.
It might even lead to improved skills that will benefit your capacity to earn money when the time comes. Similarly, you purchase a piece of land with the hope that it might increase its value over time.
- The investment aims at building the prospects for future growth or income.
- However, it does not guarantee additional income. Sometimes, the circumstances might lead you to losses.
- Investing is nothing less than leveraging your savings for potential earnings.
Thus, saving and investment are two contradictory concepts. While savings involve less risk, investment has a higher risk.
Types of investments and examples
One can mainly make two different types of investments – economic investments and investment vehicles. Let us take a closer look at both.
Economic investments are related to economic growth by engaging in fair business activities.
Suppose you own a product manufacturing firm. You buy new machinery that will manifold your per-hour production capacity. Thus, you are making an investment decision about whose benefits you will reap when your product goes on the market.
The increased sales will add to your wealth, making this investment decision pay you more.
From the macro-environmental perspective, this small decision by you could contribute to increased consumption. This investment would also result in an increased GDP of the nation as a whole. (Here is our definition & example of the gross domestic product)
Various organizations function within the economy to offer investment services to individuals and businesses. These services increase the wealth creation capacity of individuals.
Many organizations offer the chance to create wealth for the customers. Some leading organizations raise debt from investors. The interest that investors receive raises their capital. (What is an investor? Find the definition & examples here)
Besides, these ventures also issue their shares, giving investors a chance to become an owner of the company. When the company performs well, it pays them handsome dividends, thus adding to their wealth.
Investment is the driving factor in generating more wealth and income for the investors. It is also a force that helps any economy move toward growth. Thus, nothing else can substitute for investment’s role in the economy.