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Definitions
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Dictionary > Definitions > Economy > Investment
Investment
Definition
Investment or investing[1] is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of g
Description
The term "investment" is used differently in economics and in finance.
Economists refer to a real investment (such as a machine or a house), while
financial economists refer to a financial asset, such as money that is put into
a bank or the market, which may then be used to buy a real asset.
The investment decision (also known as capital budgeting) is one of the
fundamental decisions of business management: managers determine the assets that
the business enterprise obtains. These assets may be physical (such as buildings
or machinery), intangible (such as patents, software, goodwill), or financial
(see below). The manager must assess whether the net present value of the
investment to the enterprise is positive; the net present value is calculated
using the enterprise's marginal cost of capital.
A business might invest with the goal of making profit. These are marketable
securities or passive investment. It might also invest with the goal of
controlling or influencing the operation of the second company, the investee.
These are called intercorporate, long-term and strategic investments. Hence, a
company can have none, some or total control over the investee's strategic,
operating, investing and financing decisions. One can control a company by
owning over 50% ownership, or have the ability to elect a majority of the Board
of Directors.
In economics, investment is the production per unit time of goods which are not
consumed but are to be used for future production. Examples include tangibles
(such as building a railroad or factory) and intangibles (such as a year of
schooling or on-the-job training). In measures of national income and output,
gross investment I is also a component of Gross domestic product (GDP), given in
the formula GDP = C + I + G + NX, where C is consumption, G is government
spending, and NX is net exports. Thus investment is everything that remains of
production after consumption, government spending, and exports are subtracted.
I is divided into non-residential investment (such as factories) and residential
investment (new houses). Net investment deducts depreciation from gross
investment. It is the value of the net increase in the capital stock per year.
Investment, as production over a period of time ("per year"), is not capital.
The time dimension of investment makes it a flow. By contrast, capital is a
stock, that is, an accumulation measurable at a point in time (say December
31st).
Investment is often modeled as a function of Income and Interest rates, given by
the relation I = f(Y, r). An increase in income encourages higher investment,
whereas a higher interest rate may discourage investment as it becomes more
costly to borrow money. Even if a firm chooses to use its own funds in an
investment, the interest rate represents an opportunity cost of investing those
funds rather than loaning them out for interest.
Author
Aziz
Author Email
azizjipsbd@yahoo.com
References
Definitions to be consulted