What is Characteristics of investment?
The features of economic and financial investments can be summarised as the return, risk, safety, and liquidity.
All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The expectation of a return may be from income (yield) as well as through capital appreciation. Capital appreciation is the difference between the sale price and the purchase price of the investment. The dividend or interest from the investment is the yield.
Different types of investments promise different rates of return. The expectation of return from an investment depends upon the nature of the investment, maturity period, market demand, and so on. The purpose for which the investment is put to use influences, to a large extent, the expectation of the return of the investors.
Investment in high growth potential sectors would certainly increase such expectations. The longer the maturity period, the longer is the duration for which the investor parts with the value of the investment. Hence, the investor would expect a higher return from such investments.
Risk is inherent in any investment. The risk may relate to the loss of capital, delay in repayment of capital, non-payment of interest, or variability of returns. While some investments such as government securities and bank deposits are almost without risk, others are riskier. The risk of an investment is determined by the investment’s maturity period repayment capacity, nature of return commitment, and so on.
The longer the maturity period, greater is the risk. When the expected time in which the investment has to be returned is a long duration, say 10 years, instead of five years, the uncertainty surrounding the return flow from the investment increases. This uncertainty leads to a higher risk level for the investment with longer maturity rather than on investment with shorter maturity.
The safety of investment is identified with the certainty of the return of capital without loss of money or time. Safety is another feature that an investor desires from investments. Every investor expects to get back the initial capital on maturity without loss and without delay.
Investment safety is gauged through the reputation established by the borrower of funds. A highly reputed and successful corporate entity assures the investors of their initial capital. For example, investment is considered safe especially when it is made in securities issued by the government of a developed nation.
An investment that is easily saleable or marketable without loss of money and without loss of time is said to possess the characteristic of liquidity. Some investments such as deposits in unknown corporate entities, bank deposits, post office deposits, national savings certificate, and so on are not marketable.
There is no well-established trading mechanism that helps the investors of these instruments to subsequently buy/sell them frequently from a market. Investment instruments such as preference shares and debentures (listed on a stock exchange) are marketable. The extent of trading, however, depends on the demand and supply of such instruments in the market for the investors.
Equity shares of companies listed on recognized stock exchanges are easily marketable. A well-developed secondary market for securities increases the liquidity of the instruments traded therein.
An investor tends to prefer maximization of expected return, minimization of risk, the safety of funds, and liquidity of investments.
Return:
All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return. The expectation of a return may be from income (yield) as well as through capital appreciation. Capital appreciation is the difference between the sale price and the purchase price of the investment. The dividend or interest from the investment is the yield.
Different types of investments promise different rates of return. The expectation of return from an investment depends upon the nature of the investment, maturity period, market demand, and so on. The purpose for which the investment is put to use influences, to a large extent, the expectation of the return of the investors.
Investment in high growth potential sectors would certainly increase such expectations. The longer the maturity period, the longer is the duration for which the investor parts with the value of the investment. Hence, the investor would expect a higher return from such investments.
Risk:
Risk is inherent in any investment. The risk may relate to the loss of capital, delay in repayment of capital, non-payment of interest, or variability of returns. While some investments such as government securities and bank deposits are almost without risk, others are riskier. The risk of an investment is determined by the investment’s maturity period repayment capacity, nature of return commitment, and so on.
The longer the maturity period, greater is the risk. When the expected time in which the investment has to be returned is a long duration, say 10 years, instead of five years, the uncertainty surrounding the return flow from the investment increases. This uncertainty leads to a higher risk level for the investment with longer maturity rather than on investment with shorter maturity.
Safety:
The safety of investment is identified with the certainty of the return of capital without loss of money or time. Safety is another feature that an investor desires from investments. Every investor expects to get back the initial capital on maturity without loss and without delay.
Investment safety is gauged through the reputation established by the borrower of funds. A highly reputed and successful corporate entity assures the investors of their initial capital. For example, investment is considered safe especially when it is made in securities issued by the government of a developed nation.
Liquidity:
An investment that is easily saleable or marketable without loss of money and without loss of time is said to possess the characteristic of liquidity. Some investments such as deposits in unknown corporate entities, bank deposits, post office deposits, national savings certificate, and so on are not marketable.
There is no well-established trading mechanism that helps the investors of these instruments to subsequently buy/sell them frequently from a market. Investment instruments such as preference shares and debentures (listed on a stock exchange) are marketable. The extent of trading, however, depends on the demand and supply of such instruments in the market for the investors.
Equity shares of companies listed on recognized stock exchanges are easily marketable. A well-developed secondary market for securities increases the liquidity of the instruments traded therein.
An investor tends to prefer maximization of expected return, minimization of risk, the safety of funds, and liquidity of investments.
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