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Investment in various types of assets is an interesting activity that attracts people from all walks of life irrespective of their the occupation, economic status, education and family background. When a person has more money than he requires for current consumption, he would be coined as a potential investor. The investor who is having extra cash would invest it in securities or in any other assets like gold or real estate or could simply deposit it in his bank account. The companies having surplus, would like to invest money in expansion or diversification of existing firm or undertake new venture. All of these activities in a broader sense mean investment.
What is investment ?
Investment is the employment of funds on assets with the aim of earning income or capital appreciation. Investment has two attributes namely time and risk. Present consumption is sacrificed to get a return in the future. The sacrifice that has to be borne is certain but the return in the future may be uncertain. This attribute of investment indicates the risk factor. The risk is undertaken with a view to reap some return from the investment.
For a Layman, investment means some monetary commitment. A person’s commitment to buy a flat or a house for his personal use may be an investment from his point of view. This cannot be considered as an actual investment as it involves sacrifice but does not yield any Financial return.
To the economist, investment is the net addition made to the nation’s capital stock that consists of goods and services that are used in the production process. A net addition made to the nation’s capital stock means an increase in the buildings, equipments or inventories. These capital stocks are used to produce other goods and services.
Objectives of Investment
1. Return: Investors always expect a good rate of return from their investments. Rate of return could be defined as the total income the investor receives during the holding period stated as a percentage of the purchasing price at the beginning of the holding period. Rate of return is stated semi-annually or annually to help comparison among the different investment alternatives. If it is a stock, the investment gets the dividend as well as the capital appreciation as returns.
2. Risk: Risk of holding securities is related with the probability of actual return becoming less than the expected return. The world risk is synonymous with the phrase variability of return. Investment’s risk is just as important as measuring it’s expected rate of return because minimising risk and maximizing the rate of return are interrelated objectives in the investment management. An investment whose rate of return varies widely from period to period is risky than whose return that does not change much. Every investor reduce the risk of his investment by proper combination of different securities.
3. Liquidity: Marketability of the investment provides liquidity to the investment. The liquidity depends upon the marketing and trading facility. If a portion of the investment could be converted into cash without much loss of time, it would help the investor meet the emergencies. Stocks are liquid only if they command good market by providing adequate return through dividends and capital appreciation.
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