Investments: meaning and definition
Financial markets have the basic function of mobilizing the investments needed by corporate entities. They also act as marketplaces for investors who are attracted by the returns offered by the investment opportunities in the market. In this context, there is a need to understand the meaning of investment and the motives of investment.
Investment may be defined as an activity that commits funds in any financial/physical form in the present with an expectation of receiving the additional return in the future. The expectation brings with it a probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Thus every investment involves a return and risk. Investment is an activity that is undertaken by those who have savings.
Savings can be defined as the excess of income over expenditure. However, all savers need not be investors. For example, an individual who sets aside some money in a box for a birthday present is a saver, but cannot be considered an investor. On the other hand, an individual who opens a savings bank account and deposits some money regularly for a birthday present would be called an investor. The motive of savings does not make a saver an investor.
However, expectations distinguish the investor from a saver. The saver who puts aside money in a box does not expect excess returns from the savings. However, the saver who opens a savings bank account expects a return from the bank and hence is differentiated as an investor. The expectation of return is hence an essential characteristic of investment.
An investor earns/expects to earn additional monetary value from the mode of investment that could be in the form of physical/financial assets. A bank deposit is a financial asset. The purchase of gold would be a physical asset. Investment activity is recognized when an asset is purchased with an intention to earn an expected fund flow or an appreciation in value.
An individual may have purchased a house with an expectation of price appreciation and may consider it as an investment. However, the investment need not necessarily represent the purchase of a physical asset. If a bank has advanced some money to a customer, the loan can be considered as an investment for the bank. The loan instrument is expected to give back the money along with interest at a future date.
The purchase of an insurance plan for its benefits such as protection against risk, tax benefits, and so on, indicates an expectation in the future and hence may be considered as an investment. From the above examples, it can be seen that investment involves the employment of funds with the aim of achieving additional income or growth in value.
The essential quality of an investment is that it involves the expectation of a reward. Investment, hence, involves the commitment of resources at present that has been saved in the hope that some benefits will accrue from them in the future.
Investment may be defined as an activity that commits funds in any financial/physical form in the present with an expectation of receiving the additional return in the future. The expectation brings with it a probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Thus every investment involves a return and risk. Investment is an activity that is undertaken by those who have savings.
Savings can be defined as the excess of income over expenditure. However, all savers need not be investors. For example, an individual who sets aside some money in a box for a birthday present is a saver, but cannot be considered an investor. On the other hand, an individual who opens a savings bank account and deposits some money regularly for a birthday present would be called an investor. The motive of savings does not make a saver an investor.
However, expectations distinguish the investor from a saver. The saver who puts aside money in a box does not expect excess returns from the savings. However, the saver who opens a savings bank account expects a return from the bank and hence is differentiated as an investor. The expectation of return is hence an essential characteristic of investment.
An investor earns/expects to earn additional monetary value from the mode of investment that could be in the form of physical/financial assets. A bank deposit is a financial asset. The purchase of gold would be a physical asset. Investment activity is recognized when an asset is purchased with an intention to earn an expected fund flow or an appreciation in value.
An individual may have purchased a house with an expectation of price appreciation and may consider it as an investment. However, the investment need not necessarily represent the purchase of a physical asset. If a bank has advanced some money to a customer, the loan can be considered as an investment for the bank. The loan instrument is expected to give back the money along with interest at a future date.
The purchase of an insurance plan for its benefits such as protection against risk, tax benefits, and so on, indicates an expectation in the future and hence may be considered as an investment. From the above examples, it can be seen that investment involves the employment of funds with the aim of achieving additional income or growth in value.
The essential quality of an investment is that it involves the expectation of a reward. Investment, hence, involves the commitment of resources at present that has been saved in the hope that some benefits will accrue from them in the future.
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