I – How is investment defined
Investment is a decision by which an individual, a company or a community allocates its own resources or borrowed funds to increase its stock of productive assets.
It is an expense, often immediate, whose long-term objective is to increase the wealth of the person, community or society that incurs it.
For an individual, investing means placing a portion of their disposable income or savings in assets such as stocks, bonds, gold or cryptocurrencies. The idea is to secure their assets and end up with more money than they initially invested.
For the company, the use of investment will allow it to increase its assets and capital and to make its profits grow.
Furthermore, it takes several aspects. It is either :
1 – Productive
When its purpose is to increase the production of an economic or ganism, reduce the cost or improve the quality.
2 – Commercial
when it comes to making a product known or distributing it, or creating innovations or inventions in the context of research and development.
3 – Collective
In case it concerns infrastructure from which everyone is likely to benefit.
4 – Audience
Of a social nature when it is financed by a community through taxes, insofar as these are expenses made with a view to sustainably improving the living conditions of all or part of a population.
II – Reasons for the investment
Generally, the driving force behind investment is the pursuit of profits. Thus, investing consists of engagea significant expense today in order to obtain a profit a in the future.
For this an investing operation involves the immobilization of capital in various means of production such as land, buildings or equipment.
In this context, we distinguish between two types of investors, whether a company or an individual.
1 – Case of a company
The investment is intended to contribute to the growth and development of the company. It is an expense made with the aim of achieving long-term gains, whether financial gains, improved productivity or increased company reputation.
Thus, investments can have several objectives :
- Improve production capacity and productivity through the acquisition of additional machine tools;
- Gain new customers or improve your brand image by carrying out a communication campaign;
- Save time by optimizing internal processes, through the adoption of task automation software;
- Lower costs, which translates into increased profits, by purchasing a tool that allows you to monitor your energy consumption, for example to find out where and how to save money;
- Maintain turnover by renewing obsolete equipment;
- Upgrade to newer, more efficient or more environmentally friendly equipment.
It should be noted that the financing of its investments can come from several sources, such as : shareholders’ equity, bank loans, venture capital, government subsidies or funds from institutional investors.
2 – Case of an individual
Investing is generally aimed at achieving personal financial goals, such as building wealth, preparing for retirement or carrying out personal projects like buying a home.
An individual will choose to invest, rather than spend, for several reasons:
- Build up a contingency fund to cover an unforeseen expense;
- Prepare a contribution for a real estate acquisition or other project;
- Preserve capital with a view to obtaining additional income during retirement;
- Set aside capital to protect your spouse or pass it on to your heirs;
Moreover, the funds needed to secure these investments often come from personal savings, as they may originate from inheritances, gifts or personal bank loans.
III – What are the 3 types of investments
According to their nature, there are three types of investment :
1 – Tangible investments
They correspond to purchases of movable and immovable property: land, buildings, factories, machines, equipment or company cars.
For example, real estate investment consists of the acquisition of real estate (apartment, house, etc.) with the aim of making a profit by reselling it at a higher price after a certain period or by renting it out, whatever the bare rental or furnished rental.
2 – Intangible investments
These are purchases that increase the value of the company’s assets, such as goodwill, licenses or patents.
3 – Financial investments
They relate to the investments of funds in assets on the stock market which increase the financial assets of the company.
There are three main families of financial investments :
A-The deposits
These are term deposits, which consist of blocking a sum of money in a bank account for a fixed period and receiving interest in return.
B-The securities
Generally, securities take two forms, stocks and bonds :
a – Stocks
The share represents a fraction of the capital of a company, and the holder of which is the owner of a part of the company, which grants the rights to vote at general meetings and to receive dividends.
Some examples of actions can be cited : Disney stock, Tesla stock, Amazon stock, Apple stock and Google stock.
b – Bonds
The obligation is a security that represents a portion of the debt. It is a loan granted to the company or the State and giving right to the payment of periodic interest.
Unlike the stock which has a variable return, the bond’s return is fixed.
C- Investment funds
They represent a share in a portfolio of securities managed by a bank or management company.
IV – The financial portfolio
There are many financial products that one can invest in and build a portfolio in. Here are some examples of these financial products :
- Investing in stocks;
- Investment in bonds considered a risk-free asset;
- Cryptocurrencies;
- Life insurance;
- Forex or investing in foreign currencies;
- Art products;
- Precious metals and gold;
- The savings booklet.
Indeed, the diversification strategy of the financial products constituting the portfolio allows its holder to protect himself against the risk of invest all of one’s wealth in a single type of asset.
V- Forms of investment
In general, the investment policy pursued by the company with in its own activities does not fall into one of these three forms :
1 – Capacity investment
It is an investment that arises from the strong demand for the company’s products or the existence of a favorable market.
This means that the company invests in the purchase of equipment, with the aim of increasing its production.
2 – Productivity or rationalization investment
Its purpose is to increase productivity by limiting expenses, such as investing in the purchase of a new, faster, more efficient and more economical machine.
3 – Replacement investment
This involves purchasing new equipment to replace old, obsolete equipment. This helps maintain productivity and avoid high maintenance costs.
It should be noted that unlike investment in capacity, which in principle creates employment, investment in productivity or rationalization tends to reduce it.